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INTRODUCTION TO BUSINESS MANAGEMENT
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INTRODUCTION TO BUSINESS MANAGEMENT
Copyright © 2020
By
Sabitu Owotutu Olalekan;
Adeniran Ademola Joshua
Esuh Ossi-Igwe Lucky (PhD)
Solomon Ayodele Oluyinka (PhD)
All rights reserved. No part of this book may be reproduced or transmitted in any form or by
any means without written permission from the author.
ISBN: 978-978-57673-1-5
Introduction to Business Management
Table of Contents
PAGE
Title Page
1
Table of Content
2
DEDICATION
3
PREFACE
4
ACKNOWLEDGEMENT
5
Introduction
Chapter 1
The scope of Business
6-12
Chapter 2:
Nigeria Business and our Economic System
13-25
Chapter 3:
Legal Forms of Business Organization
26-38
Chapter 4:
The Business Environment
39-51
Chapter 5:
Accounting as a Business Management Tool
52-65
Chapter 6:
Sources of Finance
66-76
Chapter 7:
Insurance and Risk Management
77-94
Chapter 8:
Principles of Management
95-106
Chapter 9:
Business Organizations Social Responsibility
107-118
REFERENCE
2|Page
119-124
Introduction to Business Management
DEDICATION
To All Our Family, Friends and Our Students,
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Introduction to Business Management
PREFACE
This book is written to expose managers in practice, experts, professionals and students to
the reality of applying the concepts of business management.
The concept of this book are well arranged to cater for learners ,researchers and managers
in practice such that it‘s adequately elucidate the core element of business management as may
be applicable to our different spheres of discipline .
It is my pleasure to bring to your understanding and equip yourself with this textbook, and
I sincerely hope that you would find it enjoyable to read and apply.
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Introduction to Business Management
ACKNOWLEDGEMENT
All glory is to almighty God for providing us with the inspiration to unite this book.
We acknowledge the contribution of various scholars/author and professional bodies
whose work provides the frame work for this publication.
We sincerely appreciate and acknowledge the motivation and encouragement from the
Rector Eng. (Dr.).Mrs,O.O Akinlure (FNSE) for providing conductive and enabling
environment.
We also acknowledge the effort and support of prince Adegite Ganiu,Mr Omo Are, Mrs
Adewuyi,Mr Ogunmodede,Mr Ajose,Mr Akingbade and entire colleagues in school of
business & management studies ,Ogitech.
We recognized Ogun State institute of Technology, Crawford University, Igbesa, Ogun
State, Nigeria, and Baliuag University, Bulacan, Philippines communities for their supports.
Finally, gratitude goes to members of our family for their patience, co-operation and
understanding during the period of writing this book.
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Introduction to Business Management
CHAPTER ONE
INTRODUCTION
THE SCOPE OF BUSINESS
When God created the earth, he gave man the permission to subdue the things in it. God provided
all that man would need but not exactly in their final consumption forms except in the case of certain
fruits and crops. But essentially, man has to till the soil of the earth, do some conversions before he can
consume most of the resources in earth. This, in fact, marked the origin of business.
NATURE OF BUSINESS
According to the dictionary definition, business refers to occupation, buying and selling. From
this description, it becomes clear that business has to do with activities which individuals or group of
individuals perform with the objective of satisfying defined needs. This is a generalistic approach to
discussing business as no distinction is drawn between activities performed for profit and non-profit
making. As business students, lecturers and practitioners, our interest should be in those activities
which are profit directed.
Boone and Kurts (1976) and Trumpp, Endrikat, Zopf, & Guenther (2015) supported this view
point when they stated business as: all profit driven economic and commercial activities which provide
goods and services necessary for a nation are living standards. These commercial activities include
production, distribution and offer of direct services also sees as conceptualization, and measurement
of corporate environmental performance.
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Business classification can be done on the basis of theory and practice. Theoretically, business
can be classified into the functional areas of production, accounting/finance, management and
marketing. Finance is further subdivided into economic and insurance. This classification corresponds
to the treatment of business in most Business Colleges in Universities and College of Technology.
In practice, however, business is classified as follows: production, commerce and direct services.
Production is a conversation process in which certain items are introduced as inputs and products
emerge as outputs. Production involves much more than input-output relationship. A complete
production system involves the following
i.
Extractive sub-system which involves such activities as agriculture, fishing, forestry, mining and
quarrying,
ii.
Manufacturing sub-system which is the process of converting inputs to outputs, and
iii. Construction sub-system which involves the building of roads, bridges, houses and factories.
Commerce involves all activities associated with trade and aids to trade. Trade relates to the act
of purchase/buying and selling of goods. It is classified into the domestic and foreign trade. Foreign
trade can be either import or export. Import trade involves the buying of goods from other countries
and bringing them into the importing country. An illustration is when Nigeria businessmen buy goods
from Singapore, Ghana, United States or Britain or Philippine.
Export trades include the sales of goods across other countries. Nigerian businessmen would sell
goods under export trade to businessmen in other countries such as Cameroon, Liberia, and France and
so on. Domestic (internal) trade is classified into retail and wholesale. Retail trade is the selling of
goods in smaller quantities to the ultimate consumers.
Wholesale trade involves the sale of goods in large quantities and mainly from the manufacturers.
Aids to trade refer to all those things that assist in the performance of the trading activities. These
include banking and finance, insurance, transportation, market research, advertising etc. Direct services
are those which are rendered by professionals. The services must be independent of any other goods. In
other words, they must be sold on their own merit Examples include health care, hair care, barbing,
laundry service etc.
Central to business is the concept of specialization and division of labour. Specialisation implies
the performance of one or few related jobs to which one is proficient to the exclusion of all others. For
example, a medical doctor can specialize on surgery. Similarly, a factory workman may specialise on
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the operation of a single machine. The need for specialisation which increases output led to the concept
of division of labour.
Division of labour is the division of work into parts and each part being assigned to one person
who is a specialist. It is a common sense arrangement by which each person concentrates on the work
he can do best. Given the operations of specialisation and division of labour, it follows that no person
can provide all he wants. He has to depend on others for the provision of those other things he requires
for everyday living. This interdependence introduces the need for exchange. Exchange in its earliest
form involved barter. Barter is the direct exchange of one commodity for another or of goods for
services performed. When Ibe gives three tubers of yams to Okoro in return for ten cups of rice, this is
barter. When Ibe workds for Okoro (known as lady‘s finger) in his farm land in return for six cups of
garri (grain), this again is barter.
Barter has its disadvantages and hence the introduction of a medium of exchange (money). In the
modern society, exchange implies first, an exchange of goods or services for money and second, an
exchange of the money needed in the ordinary course of life (Strafford 1971, p.3), the whole of
political economy, indeed most of modern science, creates a culture based upon the 'real' (Baudrillard,
2016). It is therefore; correct to say that modern business revolves around specialisation, division of
labour and exchange
OBJECTIVES OF BUSINESS
Any business firm must have basic objectives which it hopes to achieve. Generally, business
firms have the following objectives.
i.
To produce goods or services efficiently and effectively to suit the needs and demands of the end users.
ii.
To generate enough revenue and to make profit.
iii. To protect the well-being of employees. To achieve this, personnel management and industrial relation
will be required.
iv. To exercise good community relations with plant neighbours and the citizens.
v.
To actualize this, business may engage on certain social responsibilities such as provision of access
roads, drinking water and scholarship awards to deserving students within the country, plant neighbour
or children of employees.
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vi. Achieving the desired rate of growth through effective management, ploughing back profit and
diversification. Thus, the availability of employment opportunities for people is linked to growth
potential.
THEORETICAL CLASSIFICATION OF BUSINESS
As earlier mentioned, we shall examine the following areas-production, accounting/finance,
management and marketing.
1.
Production
Every business must produce one form of product or the other. Some firms produce tangible
products while others produce services. Goods or services must be produced before consumers‘ needs
can be satisfied. Production is basically the process by which raw materials (inputs) are converted into
finished goods (outputs). This definition applies equally to human services which are rendered directly.
These four major steps are necessary for an effective production process (Vadim, Valery, Ivan, &
Dmitry, 2015; Braungart, McDonough & Bollinger, 2007; Williamson, 1981) namely;
i.
set input and output standards;
ii.
compare actual performance with standard performance;
iii. take corrective action where performance is unsatisfactory; and
iv. measure productivity by comparing output with input.
2.
Accounting/Finance
Simply described, according is the recording of business transactions in such a manner that the
records will show at any point in time the true affairs of business. A large firm with high sales turnover
may not know whether or not it is making profits or losses unless its accounts books are systematically
kept to show the financial implications of the business. A successful business firm is judged by its
ability to meet its financial obligations as well as declare profits at the end of the financial years. While
a firm may not be required to balance its expenditures with its revenues in the short run, on the long
run, it will be required to do so.
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Accounting procedure deals mainly with the recording of business transactions while the financial
management component deals with the forecast for the future. The financial directors must ensure that
enough funds are set aside to provide the following.
i.
Maintain an adequate reserve to meet contingencies.
ii.
Replace capital assets, such as machinery, when necessary.
iii. Cover fixed interest payments on loans and overdrafts.
iv. Permit the distribution of appropriate dividends to shareholders.
3.
Management
All business firms should have a crop of experienced and seasoned managers if they are to
succeed. Management is, in fact, a general term which should apply to those who have subordinates
under them. By definition, management is the process of getting jobs done through people. A manager
is, therefore one who plans, organises, direct and controls to ensure that set goals are achieved at a
minimum cost to the organisation.
In fact, there was that misnomer where "Management" means the same thing as "Business
Administration. ―Business Administration is the umbrella to which management is only an element. In
practice, some categories of staff are referred to as managers, accountants, marketing executives etc.
While there is nothing wrong with such designations, it is important to know that no matter by
management functions and they have subordinates reporting to them. Essentially, therefore,
management principles are such that should be taught to every person because we are managers in one
form or the other.
There are however, some specialised areas of management and these include industrial relations,
production studies, personnel and human resources and others. In addition to the managerial functions,
all managers are required to help in the recruitment of qualified staff depending on their departments
and to help motivate these workers.
4.
Marketing
It is important that we emphasize the fact that marketing is not selling. Just as management is a
component of Business Administration so also is selling a component of marketing. Most people
coming in contact with the discipline of marketing for the first time have the pre-conceived knowledge
of marketing and selling being the same thing.
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Kotler (1980 p.31) brought the difference between the two the fore when he observed that:
Selling focuses on the needs of the seller, marketing on the needs of the buyer. Selling is concerned
with the need for the seller to turn his product into cash; marketing with the concept of satisfying the
customer's needs through the product and the whole cluster of things related to making, distributing
and eventually consuming it (Baker, 2016, p25-42). Marketing is consumer oriented in that it
anticipates consumer demands and design strategies to satisfy these demands profitably.
As documented supported by Williamson (1981:221) and by Kotler, Keller, Ang, Tan, & Leong
(2018), marketing department basic tasks include:
i.
Identifying opportunities in the market and producing sales forecasts.
ii.
Initiating and co-ordinating new product innovation and development.
iii. Planning and developing a profitable product range
iv. Maintaining the personal selling effort at a high level of performance and cost efficiency.
v.
Ensuring that the physical distribution of goods meets the needs of company strategy.
vi. Developing and implementing advertising and sales promotion plans.
vii. Providing the planned level of customer and technical service
viii. Monitoring product pricing and initiating desirable changes.
These tasks are normally incorporated in the 4ps of marketing. These are products, price, place
and promotion. The 4ps or marketing combination elements form the basis of examining any marketing
problem.
WHAT RESOURCES DO BUSINESS USE?
Business firms must combine certain resources to be able to achieve their stated goals. Such
resources are land, labour and capital.
Land: This is one of the natural resources provided by nature and is in fixed supply. In recent
times, land can be extended through reclamation. The reward for land is rent. All forms of business
require land spaces for varying reasons office space, factory, farming, car parks, recreation facilities
etc.
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Labour: Labour is a human resource. It is offered in return for salaries and wages. The reward for
labour is influenced by demand for it, the quality and some environmental factors. Labour can be
unskilled, semi-skilled or skilled. The more skilled the labour is, the more reward it attracts. Cleaners
are unskilled workers as cleaning does not require any special training. Since any person can do it, the
reward is usually low. Office clerks are semi-skilled workers who need some level of training and
education to perform the job.
Since a clerk must attain a basic requirement, the job is not open to everyone and consequently
attracts a higher reward than the unskilled worker. A lecturer is a skilled worker because he has to have
a specialised are and obtain a class of degree to be allowed to lecture. This requirement attracts a much
higher reward to his labour.
Businesses require a combination of these levels of workers to perform their normal activities. In
fact, the human resource is the most important resource because it is the human who combines the
other resources. It is the human being who takes the necessary risks and initiatives to float businesses
and hence the entrepreneur.
Capital: Capital is that part of wealth set aside for the production of future wealth (Hayek, 2011).
In the words of Samuelson (1980; 558) Capital (are) goods produced by the economic system itself to
be used as productive inputs for further production of goods and services. These capital goods, which
are both outputs and inputs, can be longer or short lived. They can also be rented.
This view of capital requires that someone (entrepreneur) should save money or mobilize money
to be able to acquire the take-off capital. Without the initial capital no matter by whatever means it is
raise, business can hardly take off. Capital is therefore very important for the operations of business
(Harvey, 2018).
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CHAPTER TWO
NIGERIA BUSINESS AND OUR ECONOMIC SYSTEM
INTRODUCTION
A business organisation is a socio-technical system that necessarily functions to achieve goals or objects. Specifically,
however, business may be defined as: all profit-directed economic activities that are organised and conducted to provide
products and services‖ (Reinecke and Schoell 1980:33).
From a generalized view point, there are many ways we may classify business, viz. According to size, number of
employees, types of goods produced, volume of production, type of equipment required, type of organizational structure
adopted and much more. Whatever its form, it is ideal that business must take place within the framework set up by society In
other words, the more it takes place in it, the customs, attitudes, needs and type of business activities. On the other hand,
business activities also have an impact on the locality where they take place. This means that business and society, influence
each other. It is the aggregate of such influences or inter-relationships that make up the business (economic) environment or
system.
THE BASIC ECONOMIC SYSTEM IN NIGERIA
In Nigeria, the basic economic system is the capitalist or free market system in which the means of production are
privately owned and controlled. This means that the bulk of Nigerian businesses take place within the framework set up by
free-market system. The state also takes part in productive activities. Hence, we have both the private and public sectors of the
economy. The profit motive is the fuel behind all private enterprises, whereas the chief concern of the public sector is in many
respects, the welfare of the people. With the state relinquishing control over more and more public enterprises in recent times
(privatization exercise), private sector has continued to swirl in importance and is increasingly dominating, conferring ever
more private property right on individuals who are ever spurred by the profit motive.
THE MEANING AND FOUNDATION OF CAPITALISM
An important heritage and tradition of the Nigerian people is a desire for a free way of life. This desire has found
expression in the effects of President Ibrahim Babaginda‘s military government to secure political democracy and to maintain
freedom of religion, of choice in occupation and freedom of enterprise in the use private property an essential element of the
capitalist ideology, or system.
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In essence, capitalism may be defined as a commercial exchange-economy based upon private property in which
productive activity is organised and conducted for profit (Smithin, 2012: 67-82; Norton 1966:6). The prospect for profit is the
primary motive in capitalism which causes businessmen to invest capital and produce desired goods and services.
The Nature of Capitalism
The classical theory of capitalism is founded upon two fundamental assumptions:
a) That human beings are rational creatures capable of understanding the natural order of the universe and that
b) The role of the government in the economy can and should be limited.
The relationship between these two assumptions led classical economists to believe that ―If all artificial barriers to
economic behaviour are removed (such as tariff, monopolies and wage controls) labour, capital and natural resources will all
seek their most profitable and efficient employment‖ (Ibid 13-23). Thus, in accordance with this line of thought, rational
persons seeking their own economic interests, without interference by the government or monopolies who enjoy ―unnatural‖
powers in the market place, will create wealth, which will trickle down in due course, to benefit the lowest segment of the
population.
The essential elements of capitalism which flow from these assumptions are:

Private company

Economic incentive in the form of the profit motive

A free market system and

Political and economic freedom
These individual elements are not however peculiar to capitalism. In the USSR for instance, the outlets for a
substantial percentage of the fresh produce, meat and milk sales, are relatively free markets in the sense that the forces of
supply and demand generally determine price rather than the government. It should further be noted that even in
predominantly capitalist countries – such as the USA – certain of these elements of the system have changed to the point
where the economies are now referred to as ―mixed‖ that is, ―purely‖ capitalist-oriented.
Private Company: the essential elements of capitalism none is more significant than the concept of property. The
term property refers to the right to exercise the use of one‘s assets. Thus, properties engage in a variety of other contractual
arrangements with respect to their assets.
Economic Incentives (in the form of the profit-motive: business executives would have little reason to care about
property and the control thereof, were it not for the simple reason that the utilization of such resources could lead to the
accumulation of wealth. Thus the profit - motive represents the fuel for the capitalist machinery.
Free-Market System: if the business executives, investors, and other benefit from the stimulation and rewards of the
profit-motive, then according to classical theory, the must have access to free markets. Free markets are markets in which
people exchange assets for money without outside regulation. In such market, prices are set by the factors of demand and
supply, as well as buyers and sellers gain experiences through trial and by error. Thus, a free market system assures suppliers
of an opportunity to compete freely, and provides buyers with a variety of alternative sources for which there is sufficient
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demand. This concept applies not only to markets, for goods but also to labour markets where buyers bid for workers and
capital, respectively.
Political and Economic Freedom: one of the keys to the existence of a free-market system is the absence of
government regulation. Yet monopolies must not be allowed to exist. This would rather seem to be a paradox. How can the
classical economic theorist political freedom expect a system to prevent the creation of monopoly power, unless the
government exercises some control over the economic institutions participating in the system? Milton Friedman (1963) states
this dilemma when he notes that "government is necessary to preserve our freedom, yet by concentrating power in political
hand, it is also a threat to freedom.
ADVANTAGES OF CAPITALISM
Capitalism aims at improving individual welfare in the society. To the end, it encourages the ownership of private
property by individuals. Thus, it guarantees the citizen in society of the right to use its assets in ways that are not inimical to
public policy and interest, to produce goods and services, and to generate wealth for the people, by generating wealth for
them..
In attempting or aiming to improve individual welfare in society, capitalism provides certain economic incentives for
the individual in society, which he is free to ―capitalise upon‖, by individual in society, which he is free to ―capitalise upon‖
by the use of his private property. These incentives include profit and economic power – including social power.
Capitalism is a vehicle for the installment of political and economic freedom. With capitalism, the individuals are given
a free hand to conduct their affairs with little government intervention. This measure of economic freedom in turn assures
political freedom. Everyone is economically free and will thus, without fear be ready to voice their political opinion and
freedom of speech, religion etc. These freedoms are of course not easily enjoyed in situations of economic dependence.
DISADVANTAGES OF CAPITALISM
The freedom to own and utilize private property for profit motive encourages greed, robbery, fraud, smuggling,
falsehood, corruption, and diverse forms of questionable payments, locally and internationally.
A free market system provided by capitalism must not fail to breed cut-throat competition among rival firms and
organisation. In more subtle cases, legislators and powerful politicians are used through protests and the "Lobby" system to
pass proves inimical to some firms but favorable to others. In more serious instances, we find for among firms and large
groups - the "mafia" and its likes of these ―under world groups also run lucrative business in hard drugs, which help further to
undermine good moral practices.
The political and economic freedoms which capitalism fosters often boomerangs. Too much freedom might encourage
the growth of powerful monopolies whose business practices may run against public interests. At least some form of
government intervention or regulation in business is always needed to check the growth of powerful monopolies and their
predatory bossiness practices, in addition to other useful function.
GENERAL RELATED BUSINESS OBJECTIVES
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At any point in time, a business organisation will always have a series of objectives (or sub objective) it is striving to
attain. Whilst the firm itself will have broad objectives to attain, the sub units within an organisation (such as the trade-union,
the management and staff, the individuals and cliques etc.) will have their respective and often conflicting goals. In all
capitalist system, what is most necessary for the efficient running of a business enterprise is a clever and amicable
reconciliation of all these goals so that a framework of objectives that will accommodate all the various objectives can be
designed and operationalized. The process of reconciling the objectives and sub objectives of organisation, however, is often
a difficult exercise the main reason being that some of these goals necessarily conflict. The pursuit of a profit-target, for
instance, constrains the ability of management to pay more wages and/or provide more fringe benefits to workers.
Following, are some of the objectives of business enterprises in Nigeria and indeed in all capitalist systems.

Profit Objective:
Although the profit motive in business may be considered unwholesome by many today, it is and will ever remain the
fuel for the capitalist machinery as already indicated. Whether we measure profit in terms of returns of capital employed net
or gross profit, it still constitutes the central focus of management attention today. Notably one reason for this is that the
pursuit of profit as an objective makes possible the attainment of other goals. For example, it is only a profitable business that
can be socially responsible, that is be able to contribute financially to the social upliftment of its community.

Sales Objective
Success in the achievement of this objective; enhances the achievement of the first - profit objective. The objective
may be stated in terms of Naira value or units of sales to be made. Usually, because there is a unit with the primary
responsibility for sales, the objective is the focus of the effort of such a department. Sometimes, the sales objectives might be
expressed in terms of the market-target of the organization. Another variant of this goal is to become the leader or retain
market leadership for the particular production or services of the organization, or for the collection of goods and services. In
whatever form this objective is stated, the primary and underlying motive is to increase revenue and, consequently, the levels
of profit.

Production Objective
In all business enterprises this is an important goal. The production target set is always reconciled with revenue and
efficiency, as well as manufacturing potential in terms of machine capability, manpower resources, and availability of raw
materials. One production objective can have two complementary components. The goal may be that of increasing production
to meet a specified target output level. It may also have the second component of meeting predetermined schedules, such as Y
product X units by the end week or month end.

Stocks Objective
Here, the aspiration is frequently the maintenance of an adequate level of stocks of finished goods, work-in-progress
and raw materials, so that the marketing (or sales) and production departments do not run out of stock and the organization
does not, at the same time, invest excessively in stocks. The levels of stock at each point in time reflect the reconciliation of
the various pressures emanating principally from the sales, production and finance departments.

PublicIimage Objective
The perception of business enterprises by the public at large and by the government, is an increasingly important
concern commanding the interest of corporate management of Nigerian business with a positive image is more likely to
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receive the patronage of the buying public than one that is considered strange insensitive. In the particular case of a
developing country (such as ours), where the government's patronage plus its legal power of coercion can determine the
survival of business enterprise does yield handsome dividends. It is for these reasons that many private enterprises spend
considerable resources in pursuing the objective of a good and continually improved public-image.

Employee-Satisfaction Objective
Employees constitute the driving force in any business enterprise. For this reason, it is, always, wise business practice
to keep them adequately motivated, with a view of making them contribute most efficiently to the realization of the
enterprise's goals and objectives. As important as this objective is, it is unfortunately one that is often very difficult to define
and to design a strategy for. Whereas shoddy work, absenteeism, disobedience to the superior and general bad attitude-to
work may be symptoms of low morale, on the other hand, high productivity, low absenteeism and good industrial relations,
although high productivity may not be attributed to any programme aimed at boosting workers' morale. Nevertheless,
management of business organizations seeks this objective by providing both hygiene and motivational factors in the work
environment (Balaji, 2016 Herzberg, 1964:3-7).

Shareholders-Satisfaction Objective
There are two main goals that shareholders are pursuing, either separately or at the same time I increasingly high
dividends and better market efficiency, or (ii) enhanced shareholding values. The dominance of a group of shareholders that
seek one of these end over the other may decide which of the two will be mainly pursued. In most cases however, corporate
management attempts to satisfy both objectives in the interest of existing shareholders, as well as to ensure the attractiveness
of the enterprise's shares as worthwhile additions to a prospective buyer's portfolio of assets (Stout, 2014).

Innovation Competitiveness
In order to survive in today‘s high competitiveness, good public image profitably and growths are the major factors that
motivate business enterprises to innovate. Because of the importance of these factors to the very existence of a business
enterprise resources are very generously allocated for the purpose of innovation in more progressive corporate business in the
country. Due partly to lack of resources and more to lack of concern, this objective, however receives only token attention of
the- management of most business enterprises..
Regardless of the goals a business enterprise has in mind, however. The achievement of these goals necessarily
depends on the existing economic system in society. An economic system results from the way the people of a society
organize natural resources, labour, capital, and management skills (the means of production) to produce and distribute the
thing they want (Díaz, Demissew, Carabias, Joly, Lonsdale, Ash, & Bartuska,, 2015: 1-16; Musselman and Hughes, 1981: 5).
MEANS OF PRODUCTION
The word "economic" has featured rather prominently in the chapter and is derived from the science called
"Economics". This science deals with the satisfaction of human wants through the use of scarce resources of production.
Since all resources are limited (relative to demand), there never are enough to give individuals and organizations all that they
want. Therefore, the "economic" system of a country must deal with the problem of allocating these scarce resources among
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the "competing parties" who want them. These scarce resources are the means of generating output, or rather they provide
means (or factors) of production (Cachanosky, & Padilla, 2015; Lipsey. 1979:52).
1. Means of production
The means of production consist not only of the free gifts of nature, such as soil, forests and minerals, but also of
human capacity, both mental and physical, and all kinds of man-made growth aids, such as machinery, machinery, and
building. It is sometimes useful to divide these resources into three main groups.
i.
All those natural free gifts like land, trees, minerals etc. which are considered natural resources as land by economists
ii.
The economists find all human resources, mental and physical, both inherited and produced, to be labor.
iii.
And all those man-made aids towards further production such as money, machinery, plants and equipment, including
everything man-made that is not consumed for its own sake, but utilized in the process of making other goods and
services, are called capital by economist.
A fourth element, ENTREPRENEURSHIP is often distinguished from just labor, The entrepreneur is one who takes
risks by introducing new products as well as new ways of making old products. Thus, he is the one who organizes the other
factors of production and directs them along new lines (Demil, Lecocq, Ricart, & Zott, 2015).
DIVISION OF LABOUR
Over several hundred years, many technical advances in methods of production have made it possible to efficiently
organize agriculture and industry on a very large scale, through what has generally become known as division of labour, or
specialization. This term simply refers to "specialization" (of labour) within the production process of a given commodity. In
another parlance, specialization means giving more effort to a specific (specialized) task rather than give less effort to a
greater number of tasks (Larivière, Desrochers, Macaluso, Mongeon, Paul-Hus, & Sugimoto, 2016).
Everywhere, within the Nigerian business system, division of labour has made it possible (and necessary) to organize
production in both small and large (and expansive) factories. The labour involved in the entire production process is simply
divided into a series of repetitive tasks and each individual does one task that may be just a minute fraction of all the tasks or
jobs necessary for the production of the commodity. Indeed, it is possible today in Nigeria for a production-line worker to
spend years doing a production line job without ever knowing what commodity emerges at the end of the line. A modern
example of specialization in our economic system is the assembly line in the Peugeot Automobile of Nigeria (PAN). Each
worker on the assembly line performs a highly specialised task.
THE ALLOCATION OF RESOURCES
Since all resources are limited, they must be most efficiently allocated. The term Allocation of Resources simply refers
to the way in which the available factors of production are allocated among the various uses to which they might be put. The
allocation of resources helps to determine how much of the various kinds of goods and services will actually be produced. In
our free-market economy, millions of consumers decide what commodities to buy and in what quantities; a vast number of
firms produce these commodities and buy the factor-services that are needed to make them, and millions of factor-owners
decide to whom they will sell these services. Collectively, these processes and individual decisions decide the overall
allocation of resources for the economy.
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OPERATION OF MARKET FORCES
The Law of Demand and Supply
This law operates within the Nigerian economic system as it does in all economies. Firstly, let us consider how the
typical Nigerian market responds to a change in consumer tastes. Let us assume, for example, that people have a much higher
desire for soybeans and a redced desire for the more popular bean varieties. This change might be the result of some new
discovery about the nutritive powers of Soy-Beans, or it might be caused by a change in feeding habit (menu), caused perhaps
by a successful advertising campaign mounted by the Association of Soy-Beans Grower of Nigeria (SBGN). The effect of
such a change will be that consumers will buy more Soy-Beans and fewer varieties of 'Other Beans". With production
unchanged, a shortage of Soy-Beans and a glut of other varieties of beans will develop. In order to unload their surplus stocks
of these varieties, merchants will reduce their prices on the principle that it is better to sell them at a reduced price than not to
sell them at all.
On the other hand, merchants will find that they cannot stock Soy-Beans because it will have because a scarce
commodity and the merchants will raise their price. As the price rises, fewer Soy-Beans will be bought. Thus, consumer's
demand for this product will be limited to the available supply. Farmers will now note that Soy-Beans prices are rising while '
Other Beans ' prices are falling. Sales of soybeans will be more competitive than in the past, because the costs of producing
them will remain unchanged, while their market prices have increased. Production Other Beans' will be less profitable than it
was, because costs unchanged, but prices will have fallen. Thus, the change in consumers' tastes, working through price
system, causes the allocation of resources to change in way that fewer resources are devoted to "Other Beans" production
more to Soy-Beans production. Economists use the reallocation of resources refers to a change in the use of the economy‘s
resources.
As production of other beans decreases, the glut on the market would decrease the quality of other beans will start to
rise. On the other hand, the expansion of Soybean production will increase its scarcity and decreases its price. These price
movements will continue until farmers are no longer paid to reduce other bean production and increase Soy-Beans
production. Whenever the price of other beans was very low and the price of Soy-Beans very high, other beans production
was unprofitable and Soy beans production was very profitable. Therefore, more soy-beans and fewer other beans were
produced. These production changes caused soy-beans prices to fall and other beans prices to rise. Once the prices of these
goods become such that it no longer paid farmers to transfer out of other beans into soy-beans, production settled down and
price movements ceased.
So, we can see how resource reallocation takes place. Other bean producers will reduce their production, so they will
lay off workers and generally demand fewer production factors. Without much difficulty labor can probably switch from
other beans to soybean production. If, however, there are certain resources (say certain areas of land) which are much better
suited for growing other beans than for growing soy-beans and other resources (say other areas of land) which are much better
suited for growing other beans than soy-beans, then their prices will be affected. Since farmers are trying to increase soybeans production, they will be increasing their demand for factors which are especially suited for the activity. This will create
a shortage and cause the prices of these factors to rise. Indeed, the production of other beans will decrease, thereby reducing
demand for resources particularly suited to other growing beans. So, these resources will be scarce, and will be forced down
on their values.
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Moreover, these changes in factor-prices in turn influence the distribution of income. Factors particularly suited to SoyBeans production will be earning more than previously and they will obtain a higher share of total national income, than
before. Factors particularly suited for 'Other Beans' production, on the other hand, will be earning less than before and will
thus obtain a smaller share of the total national product than before.
These changes may be summarized as followed;
i)
Changing consumer tastes causes a shift in purchases those results in a shortage or surplus appearing. This in turn
causes an increase in market prices in the event of a shortage, and a decline in the case of a surplus..
ii)
The variation in market prices affects the profitability of producing goods, profitability varying directly with price.
Producers will shift their production out of less profitable lines and into more profitable ones.
iii)
The effort to change the production pattern would bring about variance in demand for production factors. Factors
which are particularly suitable for the production of goods for which demand is increasing would themselves be heavily
demanded in order to increase their prices. Changes in factor prices cause changes in the incomes earned by factors and this
changes the distribution of the national product.
iv)
Therefore, the paradigm shift in consumers ' preferences sets in motion a series of market changes that cause
resource reallocation in the appropriate direction and in the process leads to changes in the distribution of total revenue among
the various production factors.
Influence of corporate business (separation of ownership and control) on Nigerian business
Corporate business organisations are, by legal implication, separate entities from their owners. In 1819, John Marshall
(Then U.S. Supreme Court Chief Justice) defined a corporation as "an abstract thing, invisible, intangible, and existing only in
consequence of the law." From that time on, a company was widely regarded as a separate and legal entity apart from its
shareholders.
Although the corporation has several advantages over other forms of business ownership, one advantage stands out,
because it strongly affects or influences our business activities in particular and the economic system in general. This
advantage is that the mere presence of corporate business in Nigeria ensures, in the first place, the existence of the Nigerian
Stock Exchange (N.S.E) with branches in Lagos, Port Harcourt and Kaduna, and the ease with which shares can be
transferred enhances their liquidity and encourages investors to buy them-activities which help, thus, to promote new and
existing businesses. In turn, promoting new and existing businesses in our economic system will bouge the level of our
economic development and, in some way, serve as an economic shock absorber in difficult times, especially during bad times
in business tides.
Furthermore, the separation of investment and management in corporate business encourages the development of
specialist managers that provide the required expertise for the efficient management of the economy's investments. This in
turn influences both the business sector and the economic system positively - in the sense that both will thus be more
efficiently sustained to the extent that they will then be more capable of satisfying a substantial part of the needs and wants of
consumers.
Nevertheless, the existence of corporate business in our economy can also have a negative influence. For example, the
separation of investment and management, characteristic of corporate business, tends to remove, or at least, reduce the
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personal commitment of the managers of business. This happens because naturally managers may want to pursue their
personal goals which, invariably, differ from those of the organization or shareholders.
THE CONCEPT OF SOCIAL RESPONSIBILITY IN BUSINESS
Since organization is a product of society, it has an obligation to assist in the accomplishment of society's goals the
precept of social responsibility can therefore be defined as the duty of (business) managers ' policies (to make those decisions
or follow other lines of action) that are beneficial in terms of society's goals and values. It may thus be seen that responsibility
and humanism are parallel concepts. Rationally speaking, there is irresponsibility when an obligation is owed by one or more
persons to another (or group, or organization) or vice-versa. Therefore, from human point of view, social responsibility can be
viewed as the moral duty of people (individuals or organizations) to behave in their own interests to ensure that others ' rights
and legitimate interests are not breached. It can be readily conjectured from this statement that socially responsible persons
(or organizations) will stand by the "Natural Order of Balance" because the rights of others are at stake.
Essentially, the core element in all organizations is ―people‖. Social obligation is then, actually owed by individuals
and not really by organizations. A university, a church, or a business enterprise does not discharge a responsibility by itself
except through those persons who work in and through its name. Social responsibility, then, is a personal attribute, since there
can be no action without personal action- brought about through exercising personal volition.
In addition, a historical perspective of profit ethic versus social responsibility ethic have moved in three distinct phases
which may be labeled as profit-maximizing management, trusteeship management and quality-of-life management (Hay &
Gray, 1974). Thus, explanation of the phases followed;
Phase 1: Profit-Maximizing Management (The period up to 19th century)
Hundreds of years and even centuries ago, business only dealt with the goal of maximizing profit (Wilson & Post,
2013; Moore, 1964). All business decisions and actions then were geared primarily toward fulfillment of this objective (Amit,
& Zott, 2015; Goering, 2014). This was the phase 1 concept of business origin of this view can be found in Smit Quality-ofLife Management h's from which dispersed the doctrine that each individual businessman acting in his own selfish desires
would be guided by an "invisible hand" to promote the public good (DesJardins & McCall, 2014; Adam Smith, 1776).
In other words, the individual's drive for maximum profits and the regulation of the competitive market-place would
interact to create the greatest aggregate wealth and, therefore, the maximum public good. This was consequently a period
when business was self-financed and private property and ownership were the dominant features. Business enterprise and
their leaders at this time sought nothing other than social and economic power, through enhancing business wealth. It was a
period of enormous extremes, in the process of which employee abuses, such as child labour, starvation wages, and unsafe
working conditions could be tolerated. No questions were raised with regard to using up the natural resources and polluting
the natural environment.
Moreover, neither was any one really concerned about urban problems, unethical advertising, unsafe products and
poverty problems. The ruling philosophy was that the road to 'salvation' (and thus to godliness) was through hard-work and
the accumulation of material wealth (Apple, 2013; Weber, 1969: Fullerton, 1967: 112). A business person could then
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demonstrate diligence and simply accumulate a maximum amount of wealth by adhering to the doctrine of profit
maximization.
Phase II: Trusteeship Management (1920S AND 1930S)
The trusteeship concept of business is characterized by a world of imperfect market which does not permit profit
maximization. In this phase business was characterised by limited liability, a divorce between management and ownership
with owners (shareholders) and the lenders (creditors) providing the finance and the professional manager does the managing
(Tittenbrun, 2011). Other contributors to the firm include customers, workers, suppliers, the government and the community
at large and these parties have their goals in business. The business managing other contributors to the firm include customers,
workers, suppliers, the government, and the community at large and these parties have their goals in business (Veblen, 2017).
The business manager was thus seen as a "trustee " for the various contributor groups to the firm rather than simply an agent
of the owner (Bowen and Greenwood The " trustee" manager therefore attempts to establish a goal-congruence for all
contributor groups with their differing goals and values, With this outlook, profit maximization became unrealistic, difficult
and certainly inappropriate, because it could not be achieved without, at the same time stepping upon toes of other
contributors to business (Warren, 2012; Steiner, 1 971 70-71). From the perspective of business, this translates into the fact
that exogenous groups had considerable impact upon and influence over it.
Phase III: Quality-of-Life Management (Enlightened self-Interest)
Phase (III) which could be called the principle of social responsibility "quality-of-life" has become popular in recent
years. Citizens from all nations have been clamoring for an increase in living standards since the 1930s.This became the
principal social goal in world societies, and it, expectedly, was to be achieved through (in addition to other equally desirable
means) the provision of more and better good services at reasonable prices.
Truly, the traditional role of business is to provide goods and services, but its continued existence and profitability, so
argued the quality-of-life exponents, is dependent upon the society within which business must go on. The company
essentially consists of employees from different organizations, stock holders, and consumers of customers, suppliers,
creditors, and government. Logically a better society is thought to provide a better business environment. That's why a
sustainable economy is seen to be based not only on economic factors but also on social factors (Fryer, Luker, McDonnell, &
Hillier, 2016). How could a person be happy if he had to breathe foul air, polluted water, live in crowded cities, use very
unsafe products, be misled by untruthful advertisement, be deprived of a job because of federal character, and many other
problems? A society simply cannot prosper for long if many of its communities are impoverished and if many of its social
problems continue to remain unresolved.
With this awareness slowly catching on, it has become the vogue on the part of well-meaning Nigerians in recent times,
to stress and call out to corporate business to promote and improve the communities where they do business and make huge
profits. Such actions, they maintain, are ethical and serve to improve the image of the business. The government, it is also
now maintained, cannot oversee just everything in the society, by passing and enforcing jaws for all circumstances.
Consequently, business must in one way or another identify itself with the maintenance of an orderly society.
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Enlightened self-interest and the campaign for social justice, "Enlightened self-interest is a significant value for
Nigeria's Phase III corporate business (Joe Duke & Kankpang, 2011) if it must become responsive to the creation of a social
system founded on the principle of equality and social justice. When a business leader begins to make and implement
business decisions that cannot be clearly justified on the basis of cost and revenue projections but are made and implemented
because they are thought to be in the company's best interests in the long run, he gradually awakens his social responsibilities
to the wider environment (Gitman, Juchau, & Flanagan, 2015).
The enlightened self-interest concept has both positive and negative dimensions. On the positive side, it can be
reasoned that anything a business enterprise does to foster a better social system based on egalitarian principles will be of at
least long range benefit to it. The negative aspect is that insensitivity to social needs sooner or later turn into a various circle:
the contributors to the enterprise‘s operation will become socially insensitive to it; the society will be embittered and this will
have negative multiplier effect – very similar to what has been termed ―inefficiency induced inefficiency‖ The times
demanded today that there be a voluntary association of selfless corporate business leaders singularly dedicated to creating
munificence for one and all-an almost spiritually blissful state of cooperative and responsible enterprise, grounded on the
balance equality and social justice.
If it is socially responsible, the trouble with some corporate business leaders, however, is that they are too quick at
measuring returned benefits of social actions in terms of money gains. If returns cannot be measured in financial terms, they
do not believe any investment is worth the trouble. They seem to have forgotten the ancient dictum ―whatsoever a man sows,
he will reap many times over. There are thus several other ways a socially responsible business manager could benefit from
his actions besides long run profit such as the building of good public image, which even serves to improve the company‘s
long run sales potential or government favors such as low or even free interest loans for implementing government projects,
e.g. mass transit, rehabilitation, housing etc.
PATTERNS OF SOCIAL ACTION PROGRAMMES FOR NIGERIAN BUSINESS
Socially responsive businesses in Nigeria have been known to take decisions and actually commit various kinds of
resources to promote some of the following key social values, which can serve to eliminate or minimize all forms of
exploitation, or at least form part of the basic need / package for promoting social justice.
a.
Rural/Urban Affairs
 Social welfare/medical assistance as part of the basic needs/package for the benefit of the rural poor.
 Social and moral development: promoting collective welfare and responsibility
 Urban renewal: fostering the quality of life concept
 Villagization: reducing urban-rural imbalances
 Employment: establishing small scale industries in the rural sectors
b.
Consumer Affairs
 Quality control: ensuring product safety
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 Design improvement: ensuring fulfillment of basic needs: foods, housing and clothing, enforced by a production pattern
which is antithetical to wasteful consumptions.
 Customer service: based to a large extent on truthful advertising.
 Marketing improvement: ensuring that the benefits of change are distributed equally and does not continue to create a
privileged class.
 Customer information and education: emphasizing fairness and forthrightness in dealing with customers and the general
public
c.
Environmental Affair
 Water pollution: avoiding industrial waste spillages that destroy crops and marine life and endanger the very livelihood of
the rural sector. In addition, sponsoring simple water treatment and rural sanitation methods (intermediate technology).
 Waste disposal/sanitation.
 Traffic control and local infrastructure
d.
Employees Affairs (also as part of the basic needs package)
 Employee housing
 Employee health and safety
 Employee cooperation (human relations).
INFLUENCE OF ORGANISED LABOUR (TRADE UNIONS)
The growth of labour in both the public and private sectors of the Nigerian economy, particularly since political
independence in 1960, inevitably necessitated a definite relationship between employers and employees. This relationship is
seen to be indispensable for large firms, if these firms are to exist longer and achieve the purpose for which they are
established. Issues such as the determination of general conditions of services, discipline, maintaining a stable work-force,
keeping production high, providing welfare for workers, etc., are of paramount importance. Typically the presence of unions
helps the workers to claim their rights (Fashoyin, 1980; 1; Drucker, 2018; Mueller, 2018:35).
The (Nigerian) Trade Union Act of 1973 described Pressure group as any ' confluence of employees or employers,
temporary or permanent, with the intention of regulating the terms and conditions of employment of workers. According to
Geoffrey Hurd (1983: 1 75), whether or not the combination in question would be exempt from this Act is, by reason of fact,
an unconstitutional combination of either of its objectives in terms of trade restriction and whether or not its aims contain
guarantees of benefits for its members " (Ubeku, 1983: 120; Friedrich, 2018:122).. Trade unions are mainly interest groups
formed to protect and further the interests of a specific occupational group against the interests of their employers or, at times,
those of other occupational groups. Usually, the representatives of labour and management of the business, enter into a labour
contract for the sale of labour services at designated wage rates and hours of work for a stated period of time.
Although, the terms of the contract are breached, there will be complaints showing employee dissatisfaction. When
dissatisfaction is serious enough to be formally expressed either verbally or in writing it becomes a grievance. Employee
grievance often culminates in disputes. In developing like Nigeria, before a trade dispute is registered, all parties to the
dispute shall meet within seven days of the occurrence of the dispute in order to resolve the problem by using the collective
bargaining mechanism. If the current collective bargaining system fails to settle the issue within seven days, a trade dispute is
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more than announced. Specifically, a trade dispute between employers and workers which is connected with the employment
contract terms of employment or condition of work of any person (Okeke, 1985: 7; Cartwright & Holmes, 2006).
However, adequate enforcement of the labour contract leads to little or no incidence of complaints, grievances or
disputes; it leads also to higher employee morale, higher productivity of the business and, eventually, to the survival and
growth of business. Since Nigerian businesses are the avenues through which the varied needs of the society are satisfied, any
strikes; picketing, or other consequences of lingering trade disputes, will have a negative impact on the nation‘s economy. At
any rate, the over-all balancing power between Nigerian businesses, organized labour, the government ( who in many
respects, regulates and participates in much of our economic activities provides contravening power so that the off-setting size
and power of each of these three, supposedly, will prevent any one of them from becoming too powerful and dominant in our
society.
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CHAPTER THREE
LEGAL FORMS OF BUSINESS ORGANISATION
INTRODUCTION
Ownership is a legal relationship between a person and some object. It is important to establish
explicitly and specifically in any company who is the legal owner for this decides who is to gain or
suffer from the business activities. Because society demands business to provide for its needs the legal
forms of ownership must be sufficiently adaptable to allow for all sort of business (Du Plessis,
Hargovan, & Harris, 2018). The economic system of Nigeria like many other countries of the world
includes business enterprises of different sizes (Muritala, 2018).They range from one man business
found in our local environment and in bigger cities like Owerri, Enugu, Port-Harcourt, and Lagos etc.
The choice of the form of ownership is one of the basic decisions the entrepreneur must make.
Each form of ownership is subject to different tax provisions. In Nigeria, regulations like Registration
of Business names under the Registration of Business Names Act of the Federation of identification
purposes is required and registration of Business Premises under the Registration of Business Premises
Law of the different state governments is also made for easy location and the collection of revenue.
OBJECTIVE OF BUSINESS ORGANISATION
Commercial production and sale of economic goods and services is the general purpose of the
company. Under the Nigerian system, every individual business has two main objectives: service and
benefit. Such goals apply whether the company as food specialities is a gigantic organization. In
addition to producing goods and services efficiently to meet the needs and desires of customers at a
profit, organisations protect the health and well-being of employee, exercise good community
citizenship in relations with neighbours and community.
Nevertheless, this business organization can take on certain social responsibilities such as: good
roads, offering universities scholarships and research grants. Given the complexity of the society's
needs, complex business structures are needed to be met. Business organization will in effect provide
more employment opportunities for the generality of the population in trying to expand its operation.
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FORMS OF BUSINESS ORGANISATION
One of the first and most crucial questions anyone starting a business must ask is: which is the
best form of ownership for me to use? Each of the several legal forms has its peculiarities, advantages
and depends on the appropriateness of the form that is selected (Musselman & Hughes, 1977: 138).
The distinctive pattern of ownership in our country like in other countries of the world is the right of an
individual or individual or individuals to acquire legal right to property for business use and to enjoy
the profits from such possession and use. Private ownership, the right of possession, control,
enjoyment and disposition of property exists side by side to public ownership which vests these rights
in government and other public bodies. Public ownership has gradually increased over the years with
the entry of the federal and state government into such fields as Housing Corporation, institutions of
higher learning like universities, banks and several and other fields. Meanwhile, there basically two
legal forms of corporate organization classified as either corporate or non-corporate. The dominant
corporate form is the corporation.
The main non-corporate types are the sole proprietorship and the partnership. The 1968
Companies Act directs the establishment of some company firms in our country (Nigeria).
1.
Sole Proprietorship
A business owned and operated by one person is known as sole proprietorship. In spite of the
growth in big business as seen in our economy, opportunities for an individual to go into business for
himself are as numerous as ever. Even in the United State it is the most common form of business
ownership in many other countries the small shop keeper is dominant (Ibid., 140).
The legal structure of the sole proprietorship is non-corporate and can be formed without
authority from an existing government unit. It is found in almost every line of business including retail
and wholesale trades; insurance and real estate agencies, construction, agriculture and service trades,
such as repair shops, radio and television and vehicle repair shops, barber shops, beauty shop and
salons etc. The sole proprietorship business is also common in many professions, such as in medical
practice, legal practice, entertainment and engineering works. It would be obvious, thus that sole
proprietorship business constitutes the major fabric of Nigeria‘s business system. Without this import
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sub-sector, many of our wants would go unsatisfied, and even big business itself may be handicapped
in many respects.
Nature of sole proprietorship
i.
The single owner has the whole responsibility for the successful operation of the business.
ii.
He must solve the problems and generally manage the business.
iii.
He supplies the capital or finance for running the business. This can be from his personal savings
or loan
iv.
The sole proprietor makes decision or policy
v.
He is entitled to all the profits and has full claim to the assets (property) of the business provided
he does not owe any debts
vi.
Legally he owes all the debts
vii. Sole ownership is simplest form of business to set up, little difficulty about organisation and
operations are encountered since it can be established quite informally. The owner will only be
required to register his business name (with the Ministry of Trade) and the business premises
(with Local government authority in which territory the business will be carried out). In addition
to simple formation he has legal requirement only, during the time of making contractual
agreements in the course of his business operations.
viii. The proprietor and the business firm are legally one and the same thing, the single owner is taxed
as an individual and not as a business.
Advantages of sole proprietorship
These advantages of business ownership form proprietorship help explain its widespread use.
i) Ownership is his own boss: When one is the sole owner of a business, he usually has a certain
pleasant feeling that he is his own boss and is responsible only to himself. He feels that he has
more of a chance to be not only inventive or creative but the feeling motivates him to work hard
and make his business a success
ii) Owner receives all profits: Being the sole owner he can stretch himself to work overtime and
always strives to maximize his profit
iii)
Owner personally knows employee and customers: Since majority of proprietorships
are small the proprietor, customers and his employee get to relate well personally.
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iv)
Owner can act quickly in decision making:He can act promptly in emergencies.
v) In decision-making, the owner can act quickly: he can act promptly in emergencies. If an
unusual opportunity to buy merchandise or equipment arises or a desire to sell on credit terms
rather than on cash basis there are no dissenting partners to hinder such action. Thus, an
individual enterprise's management is flexible and can easily adjust to changing conditions.
vi)
There are no legal restrictions.
vii)
Owner is free from red tape and can keep his business secrets, he can cease business
activities without legal formality
Disadvantages of sole proprietorship
On the other hand sole proprietorship has disadvantages such as:
i)
Owner has unlimited liability for debts:He bears all losses and assumes a great amount of
risk. Should the business fail he loses not only the capital invested but also his personal property.
ii)
Sole proprietor may lack special skills and abilities
iii)
Difficulty in raising capital: Often there is need for additional fund for expansion or for
emergencies: financial assistance on a large scale may be difficult to obtain
iv)
The burden or operation responsibilities are borne by the owner as the business grows
v)
There are limited opportunities for employee.
vi)
Uncertainty of duration: Death, permanent illness or bankruptcy may close the business
On the whole, sole proprietorship is dominant and desirable, especially when a person has a little
capital and wishes to begin a small business and the need to get started quickly is urgent.
The economic system in Nigeria today is undeniably centered on the legacy of sole ownership,
which has existed since the beginning of Nigeria society, and will continue for a long time to
perpetuate this form of business ownership.
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PARTNERSHIP
Like the sole proprietorship, the partnership is a form of ownership has existed for ages. In some
respects it is an extension of the proprietorship but it is designed to include more than one owner.
There can be no partnership without the expressed intention of all partners.
Definition of General Partnership
A general partnership is an association of two or more persons acting as co-owners of a business
for profit. The number of people who can enter a general partnership agreement can be two but should
not exceed twenty persons. They may invest equal or different amounts of capital or services or both
and receive equal or different shares of the profit. Unless the terms of the partnership agreement
provide, otherwise each partner has a right to participate in the business by making decisions.
Classification of Partners
The classification is done based on the type of participation in the management share of profits,
liability, duration and responsibility for major decisions.
i)
General partner: A member of a general or limited partnership who has unlimited liability for
the debt of the firm. He actively engages in the transaction of the firm
ii)
Limited or special partner: The liability is limited to individual contribution. But there must be
at least one partner the limited partner, who is subject to the unlimited personal liability.
iii)
Secret partner: A partner who plays active role in the business but does not want to reveal his
identity to the public.
iv)
A nominal partner holds himself out as a partner or permits others to hold him out as such. He
is not actually part owner of the business since he neither shares in the management nor the profits but
in some instances he can be held liable as a partner.
v)
Inactive partner: is one that plays no active role and is unknown to the public at the same time.
vi)
Senior partner: A general partner who has long been with the partnership and who holds a
large share of the general partnership.
vii)
Junior partners are owners for a short duration who are not expected to assume a great
responsibility for major decisions.
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Formation of a Partnership
The authority for forming a partnership impinges in the voluntary association commonlaw right. Therefore, an agreement of intent which may be oral, written or implied by the acts
of the parties to the agreement is central to all general partnerships. It is preferable that the
agreement be in writing to avoid later misunderstanding. The general partnership agreement
is usually called Articles of Partnership or Deeds of Partnership or Co-partnership Articles
and is a contract containing the articles upon which the general partners have agreed and
cover the following:
i)
Firm‘s name
ii)
Name of partnership owners
iii) Location of the business
iv) Nature of the business
v)
Duration of the agreement
vi) Amount of each partner‘s capital
vii) Provision for accounting system and a fiscal year
viii) Provision for salaries or drawing accounts of partners
ix) Distribution of profits or losses
x)
Procedure for dissolving the partner
xi) Statement of individual partner‘s duties
xii) Method for determining a partner‘s investment if he wishes to withdraw
Right and Duties of General Partners include:
i)
The right to participate in the management of the business
ii)
The right to examine the partnership records and statement of its financial
conditions.
iii) The right to divulge in partnership assets on termination of the agreement
iv) The duty to observe the terms of the agreement.
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v)
The willingness to act in good faith when communicating with other partners
vi) The duty to exercise reasonable care and skill in handling the affairs of the partnership
involving third parties. Partnerships are advantageous in the profession of law, dentistry,
medicine and accountancy.
Advantages of partnership
i)
Skill and abilities are pooled. A division of duties based on special ability of partners
may be affected. Combined abilities of the partners should result in more efficient operation
ii)
Possibility of raising larger capital resources and improved credit position
iii) A partnership can operate in any state
iv) Each partner contributes his good-will by bringing a large personal resources
v)
A minimum of legal restriction is required to form a partnership
vi) Partners are taxed individually rather than the business income
vii) Elimination of competition. To do this, more sole proprietors may combine their
businesses by organizing a partnership.
viii) Retirement from management: An individual proprietor may admit a partner to take over
active management. Also a partner may take holidays or rest due to illness without harming
the business
ix) Partners can have their affairs treated in private because disclosures not made public
except to the Inland Revenue.
x)
Economic operation can be accomplished: by merging two or more firms, an economy
can be achieved by reducing overhead costs such as ads, inventory, machinery, fuel and rent.
Disadvantages of partnership
i)
Unlimited financial liability of general partner
ii)
There is possibility of disagreement because if there are divided authority and
unsatisfactory division of profits
iii) The partnership is lacking in performance
iv) The partnership is lacking in performance
v)
Difficulty in withdrawing from partnership
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CORPORATION AS A FORM OF BUSINESS OWNERSHIP
Corporations dominate the economic structure and make up a substantial portion of national
income. This occurs in many sectors of the economy, like growth, transport, communications,
telecommunications, banking, and retail. The organization's project strategy is the company for a
business that requires a lot of money. The most important form of business ownership in Nigeria is the
corporate form of business in terms of sales volume; number of employees, wages paid and owned
physical property.
Definition: corporation is an association of individuals organised under a charter granted by the
state. It is in a sense an artificial person created by the laws of the state. Being the mere creature it
possesses only those properties which the charter of its creation confers upon it, either expressly or as
incidental to its existence. As an independent legal entity, it may have perpetual life hold property,
conduct business and enter into contracts, sue and be sued. It has the right to buy, to sell, own,
manage, mortgage and otherwise dispose of real and personal property. Its owners who may be used
as the directors are called stockholders and shareholders (ownership is represented by transferable
stock certificate)
Various Forms of Corporation
Corporations vary according to their charter restrictions and types. Notable ones are private,
public and government or statutory corporations. Private corporations: under this category are
corporations formed and owned by private individuals usually for the purpose of making profit and
those chartered for non-profit like the social, religious, charitable, recreational or educational
corporations. Examples of those chartered for profit include Onwuka Interbiz, Ekene Dili Chukwu
transport limited etc..
The two important features of private corporations are that the numbers of shareholders may be
as few as two but the maximum must not exceed fifty, excluding past and present employees of the
company. Secondly, a shareholder is not permitted to transfer his share without the consent of the
company and cannot invite the general public to subscribe for shares
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Public Company
It is essential characteristics are as follows:
i)
There should be at least seven shareholders but no requisite maximum number.
ii)
An association article which provides details of the internal operations, a description of the
purposes of the corporation, including voting rights of shareholders and power and duties of directors.
iii)
This must file with the company registrar, after which a prospectus and an appeal to the
general public to subscribe to the shares may be published.
iv)
Association Memorandum. This gives the details of the types of business to be undertaken, the
amount of its authorized capital, the address of the registered office, details of the shares to be divided
into and a statement that its liability is limited.
v)
The shareholders select the directors and the directors formulate general plans and policies and
appoint the officers. The officers have charged of the active management of the business and have the
privilege of employing additional persons if necessary to operate the business.
vi)
Annual returns of the public companies are usually published. Examples of the public
companies are: United African Company (UAC), Lever Brothers, John Holt, First Bank, Union Bank,
Guinness, Allied Bank, Merchant Bank etc.
CHART SHOWING THE TOP MANAGEMENT STRUCTURE OF A CORPORATION
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STATUTORY CORPORATION
A statutory company is incorporated by Act of parliament. This type of company is rare today.
Statutory companies are formed to carry out public utility services in the areas of gas, water and
electricity supply. According to Stafford (1969:30), statutory companies still exist where public
services such as water supply, remain under private ownership. The power of a statutory company is
defined by the special Act which created it (Grossi & Thomasson, 2011).
The government attempts to handle various social services known as public utilities through the
setting up of the boards. With the exception of the parastatal, the boards are funded through budgetary
provisions since they are nonprofit oriented. The organisations that fall within this category are the
water boards, health management board, and state school management board.
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Advantage of a corporation
i)
Life of corporation is almost perpetual,
ii)
Shareholders have limited liability. Being a legal entity, each shareholder stands to lose only
the amount of money he invested in the stock. Risks are spread over a large number of people.
iii)
A corporation can raise large amount of capital from small investors as well as large
businesses
iv)
New investments can be more easily attracted to the sale of stock without altering the
organisation form. It can therefore grow faster with ease of expansion.
v)
There is delegation of managerial functions and generally professional management
vi)
There is adaptability to both small and large businesses
Disadvantages of the corporation
i.
Segregation of management and ownership: managers are often not owners and may not be as
oriented towards the aims of the organization as are the missing owners.
ii.
Complete absence of close personal and community relationships: companies tend to be distant
in terms of their employee and community relationships, which can be clarified in terms of size.
iii. Heavy corporate taxes: the corporations‘ profits are subject to double taxation unlike the
unincorporated business forms. They pay federal and usually state corporation taxes based on
income. The owner shareholder must pay taxes on dividend i.e. distributed profit.
iv. Government regulation: corporations are subject to government supervision and regulation.
Reports are generally required and published.
v.
Higher starting cost due to legal fees associated with incorporation such as legal and filing fees.
vi. There is possible limitation of activities by charter restriction.
CO-OPERATIVE SOCIETY
The cooperative mode of ownership of the company is distinct from all other types mentioned.
A cooperative is characterized as a member owned and operated organisation. It is operated for the
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purpose of supplying goods and services to its members. For a cooperative to operate as a business it
must secure from the state a charter similar to that of a corporation. This is achieved with the
cooperative ministry supplying the cooperative societies with statutory guidelines.
It is this type of business that the capital is provided by individuals who buy similar shares to a
corporation's. Each shareholder has one vote in the management of the business, no matter how many
shares it owns. The excess earnings in the form of dividends go to the shareholders.
Co-operatives in Nigeria and some other developing countries have a prominent presence in
many business areas like retail, agriculture, banks and Nigeria's cooperative bank. Cooperative
societies enjoy the backing and support of the federal and state government.
Types of Co-Operatives
The following are the common type of Nigerian cooperatives and some developing countries.
i.
Consumer co-operative
This is one of the simplest forms of co-operatives. It may be a retail store established by a
group of consumers to make it possible for them to buy goods at the wholesale cost. By making
one large purchase goods are bought at a lower price than if a purchase of smaller quantity is
made. Under this group can be found wholesale, retail and service co-operatives which are
established with the motive of reducing cost.
ii.
Producers co-operative
The producer cooperatives are two cooperatives in the field of agricultural marketing and
the workers ' cooperatives. In the former are associations of the grower or producers of a single
product or a group of closely related products. The latter is a producers co-operative organised by
workers. The workers combine their own capital and either rent or purchase a plant. They
manage the plant, do the work themselves and share the profit or losses. These associations have
other purposes like
a) Improving merchandising practices
b) Creating demand by using brand names and mounting advertising
c) Promoting better ways of marketing
d) Giving financial assistance to members
e) Improving quality
iii. The agricultural purchasing co-operative
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A sort of association is set up to serve farmers in the cooperative purchasing of agricultural
products. The associations sell productions such as seeds, gasoline, feeds, fertilizer and farm
machinery or equipment at lower cost or on loan to their members but also to non-members.
Examples of this form exist in most states of the federation and are being encouraged by such
agencies as better life for rural women in recent times among rural dwellers.
Advantages Co-Operatives
These includes
a)
Tax relief e.g. farmers co-operatives do not pay corporate income tax if they are able to
meet the legal requirements of the federal and state government
b)
Low organizational cost
c)
Low cost of purchase
Disadvantages Co-Operatives
i) Producers are however not free to sell their products in any market of their choice at anytime
ii) Co-operatives are nonprofit organisation
iii)
Less effective management: the tendency to pay low salaries means inability to
employ most competent manager
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CHAPTER FOUR
THE BUSINESS ENVIRONMENT
INTRODUCTION
Many Nigerian organizations tend to forget that they have a responsibility to function within the
constraints of the environment and that environmental factors can and do influence their activities
positively or negatively. Against this backdrop, this chapter aims to achieve the following objectives.
1.
To discuss the nature of business environment
2.
To highlight and to explain in detail the various environment and components,
dimensions of
business environment and the way they affect business operations and
3.
To see how organisation can adapt to these dynamic complex environmental factors. Adaptation helps
organisation to reduce environmental impact, particularly the
unfavorably ones
THE NATURE OF ORGANIZATIONAL ENVIRONMENTS
An environment can be defined as a set of conditions and forces which surround and have direct
influence on the organisation (Garba, 2019; Onuoha 1990, 171). In other words, every organisation is
continually being, impinged upon by environmental factors. Organisation, whether they are political,
military or economic have had to acquire their resources from their environment, transform them into
product and services desired by their environment provide these outputs to environmental customers
of one type or another (Cummings, & Worley, 2014:32; Watkins, Swidler & Hannan, 2012; Hill
1974: 287).
The environment, thus, provides three main things to organisation (i) opportunities (ii) threats
(ii) constraints. These environmental elements present business challenges and problems in most
cases. Therefore, one can rightly say that environmental factors play a crucial role in determining any
organization‘s success or failure. Consequently, any organisation that ignores or refuses to respond
(or adapt) to these factor is building troubles for itself. The ability and willingness of an organization
to make maximum use of environment opportunities, avoid or manoeuvre it threats and operate within
the constraints reflect the hallmark of a responsive and efficient organisation. Managerial actions and
style should aim at effectively matching the opportunities and demand of the environment with the
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strength and weaknesses of the organization‘s resources – human, financial, physical, system and
technological.
Broadly, the scope of organisational environment can be categorised into three groups
a.
internal environment
b.
task environment
c.
the general environment. We will discuss these environmental groups as follows:
a) The internal environment
The internal environment (or climate) of an organisation can be explained from two main angles
(i) identification of the major resources of an organization (ii) the analysis of the perception the
organisational members have or shared about the organisation‘s nature character and overall
management style. All these will be discussed in turn.
i)
Resources of an organization
For an organisation to take adequate advantage of environmental opportunities, it must possess
the capacity and ability to attain against many odds, what it sets out to do. Essentially, this capacity
and ability to accomplish predetermined goals is directly related to the resources of the organisation.
While environmental opportunities establish what an organisation might do, the resources of an
organisation dictate what it can do.
All organisations have at least four types of resources they can use to achieve their goals:
financial, physical, human, system and technological capabilities (Szilagyi Jr 108). The various
components of organisational resources have been summarized in the table 3.1.
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Table 3.1 Organisation Resources
1
2
3
4
Financial
Resources
Physical
Resources
The acquisitions allocation, and control of money for financiering plant construction,
inventory, research and development receivable and working capital, involve for
example the debt capacity
Include (i) efficient manufacturing plants and other facilities (ii) location of facilities
with respect to markets suppliers or utilities and (iii) ownership or contractual access to
needed raw materials
Human
The human resources include but are not limited to personal (engineers, scientists,
Resources
skilled labour) and skilled experienced management.
System and
Technology
Expertise and particular competence in process elements (quality control system,
information system, distribution systems and the like) and outputs (patents, brand,
loyalty, and high quality product)
ii) Analysis of the perception
Perception is the process by which individuals assess information from the environment,
organise it and make out meaning from it. Individual perception about anything may be intellectual or
emotional. These two factors are difficult to separate in practice and probably most decisions involve
some elements of both. Apparently, emotional values are central in the partnership of most people at
work or away from work. (Druskat, & Wolff, 2001; Davis 1967:31).
In other words, perceptual framework is not in the physical stimulus, but in the observer, so two
people may have different perceptions of the same facts. Each perceives the facts in terms of his
problems, interest and background. He tends to bypass any details which do not fit personal needs.
Some internal factors which also influence perception include the stress and strain of the situation
group pressure, and the reward system of the organisation. Past experience has a direct influence on
the interpretation of stimuli or perceptual process. Another aspect of perception is the perceptual set;
which means that a person can be influenced by co-worker or colleagues to perceive something in a
particular way. For example, if a new employee has been informed by friends or co-workers that his
would be supervisor or manager is very sympathetic and friendly he is more likely to see a friendly
supervisor and will also respond in a friendly manner (Ryback, 2012: 89; Onuoha 172).
When organisation members have positive perceptions (favourable opinions) about the character,
nature and management style of the organisation, the organisation is better off. But this will not be the
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case if their perceptual process in the organisation has the sole aim of influencing attitudes and
behaviour of its members. This will help to create better and more favourable perceptions. As a result
of the adverse effects of negative perceptions, organisations must manage them just as they do to other
aspects of organisational practices.
b)
The task environment
The task environment is also known as dire-action environment. The task environment of an
organisation consists of other specific organisations that are likely to influence that organisation. The
basic elements of task environment include i) competitors, ii) suppliers, iii) regulators, iv) unions and
associates. Because the relationship between organisation and the task environment is much closer
and more direct, most organisations in the advanced countries now focus more on it than on the
general environment. Nigeria organisations should also follow this path. We shall now summarise
components of the task environment using Nigeria examples.
i).
Competitors task environment
Organisations in the same or related line of business or industry cooperate with one another for
resources, especially customer‘s patronage. For example, Peugeot Automobile of Nigeria (PAN) and
Volkswagen of Nigeria (VON) are competitors in the area of passenger cars; all universities in
Nigeria compete with one another for good students, lecturers and other essential inputs; film theatres
also compete for customers. Two different organisation can also compete to secure a loan from a
financial institution that has limited sum of money to lend out. Organisations may also compete for
raw materials, technology breakthroughs and high quality manpower.
In some areas of economic and human endeavours, government is a competitor. For example, the
federal and state printing presses compete with private printing presses for customers; the individual
tanker owners (that supply water to people) compete with water boards for customers; secondary
schools (state owned) compete with commercial schools (individually owned) for students and so on.
There are two types of competitions in an economy –domestic and foreign. Domestic
competition comes from within the country while foreign competitions come from outside the
country. Every organisation should monitor closely the activities of its competitors. This is because
the activities of these competitors will definitely affect its operations. Monitoring is done by obtaining
relevant and up to date information on competitors‘ activities. It should also be noted that some kinds
of information about competitors are difficult to get. Research and development programmes in such
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areas as new product development, marketing or advertising strategies etc. are usually kept very
secret by organisations.
ii) Customers task environment
Satisfying customers at a profit is the aim of the marketing concept. A customer is a person who
parts with his money to acquire a product or service from an organisation. The marketing concept is
fairly new idea in business. It replaces the production oriented way of thinking which involves
producing goods and then trying to sell them. The marketing concept calls for changing the firm‘s
way of doing things. Instead of trying to get customers to buy what the firm has produced, a
marketing oriented firm would try to produce what customers need (McCarthy 1981:31). Advocates
of the marketing concept believe that customers and their needs should be the firm‘s main focus.
There are various categories of customers: individuals, retailers, wholesalers, hospitals, corporate
bodies, educational institutions, religious, humanitarian and government agencies etc because of the
complex nature and character of some of these customers, every organisation should pay adequate and
close attention to the customers. Information about customers can be obtained from the following
sources: report from sales representatives, consumer panels, survey and research.
iii) Suppliers task environment
Suppliers are people or agencies that provide key resources of the organisation. They may
include raw materials suppliers, capital suppliers such as shareholders, financial institutions,
investors, state and federal lending agencies. State and federal governments and alumni associations
do supply capital to almost all the higher and research institutions in all the countries. This is done
through direct grant to them. Private and public employment agencies and institutions of higher
learning provide human resources for the organisation.
In addition to providing resources for the organisations, suppliers also provide relevant and firsthand information to the organisation. It is therefore very important that an organisation should
maintain a cordial relationship with its suppliers. Against, this background, it has become important
that Nigerian organisations should develop and maintain a variety of suppliers. This has become
necessary in order to (a) reduce dependency on a particular supplier (b) to reduce the possibility of
sabotage by the supplier (c) to avoid unforeseen risk where the supplier goes out of business or where
the supplier is faced with an imminent strike; or where he raises prices to a prohibitive level (Griffin
77). Nigerian organisations can also try and gain control of a key supplier, if possible. This means that
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the hitherto independent supplier or company now becomes a subsidiary of the organisation. Finally,
information on suppliers and their activities can be obtained from business newspaper and journals,
research firms or through economic and legal forecasts.
i)
Regulators task environment
Regulators are units in the task environment that have the potential to actively control, regulate
or influence an organisation‘s policies and practices. There are two categories of regulators;
government agencies and interest groups.
There are two broad reasons why government seeks to regulate business.
1.
Fostering maximum output of desirable goods and services that will contribute to reduced
unemployment? Forms of government intervention aimed at promoting high and rising level of
production include.
a)
The creation and maintenance of competition
b)
The curbing of monopolistic restrictions
c)
The purposeful use of public expenditures and taxes to influence the level of
employment and business activity
d)
The direct adoption direct control or public ownership in certain monopolistic industries
e)
The promotion of research and technology and
f)
The development and conservation of natural resources
2
To provide prices and income harmony with public interest. Price stability helps to promote in
saving and monitor inflation rate. Income may be determined in three ways (a) equally (b) in
accordance with people‘s needs (c) upon the basis the economic values that is the importance of one
productivity and the productivity of his property. Some of the government agencies that were
established to regulate business activities in Nigeria include:
i.
Central Bank of Nigeria (CBN)
ii.
Various Rent Boards of States
iii. Standard Organisation of Nigeria (SON)
iv. Securities and Exchange Commission (SEC)
v.
Health Management Boards of States
vi. Nigerian Enterprises Promotion Board (NEPB)
vii. Prices, Productivity and Incomes Board (PPIB)
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viii. Expatriate Quota Allocation Board etc.
Interest groups constitute another form of regulators. There could be formal or informal groups
and through their activities influence organisation. This, they do by using both the electronic and print
media to draw the public‘s attention to their activities. Example of interest groups includes the various
consumer groups and the National Council for Nigerian Women Society (NCWS), among others.
ii)
Unions task environment
For the unionized organizations, labour unions constitute an unavoidable element of the task
environment. The Trade Unions Decree of 1973 defines a trade union as:
―Any combination of workers or employees, whether temporary or permanent, the purpose of
which is to regulate the terms and conditions of employment of workers, whether the combination in
question would or would not, apart from this Decree, be an unlawful combination by reason of any of
its purpose being in restraint of trade, and whether its purpose do or do not include the provision of
benefits for workers.‖ From the above definition, the main purpose of a trade union is the regulation of
the terms and conditions of employment of workers. Section 2 of the Decree prohibits a trade union
unless it is registered. The law gives registered unions many benefits, as stated by Ubeku (1975:157-8)
and endorsed by George, Owoyemi & Onokala (2012) these included;
(i)
The law provides that the purpose of a trade union shall not, by reason only they are in restraint of
trade, be unlawful as to render void of voidable any agreement or trust relating to the union.
(ii)
Certain agreement entered into by union the for the furtherance of its lawful purpose are
not
subject to legal proceedings and therefore no action can be brought in respect of them.
(iii)
Under the Decree, no court in Nigeria shall entertain an action against a trade union in respect of
any tortuous act alleged to have been committed by or on behalf of trade union in contemplation of or
in furtherance of trade disputes. Nigerian business organizations should be aware of the facts that there
are many trade unions and one central union in Nigeria.
Nonetheless, Nigerian Labour Congress (NLC), that these unions have the weapon of strike at
their disposal, including the Trade Union Decree of 1973. As a result, they should take the activities of
unions seriously. They should also try to play down the negative aspects of union. This has the aims of
reducing conflicts and dispute between them and these unions.
(iv)
Associate benefits can be described as fairly independent entities managed notably by the parent
or holding company by another entity. In other words, associates are subsidiaries. Many multinational
corporations operating in Nigeria such as UAC, SCOA, John Holt, Tate & Lyle Industries, Lever
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Brothers, to mention but a few of them, have subsidiaries scattered all over the world. With the
increasing profit potentials, Nigerian business organizations should start to think seriously of
developing and maintaining associates to other organization (Garba, 2019; George et al., 2012;
Onuoha: 177).
c)
The General Environment
There are many dimensions to the general environment. But for the purpose of our discussion,
they can be subdivided into the following components:
i.
The legal and political environment.
ii.
The social and cultural environment.
iii. The economic environment.
iv. The technological environment
v.
International environment
I
Legal and political environment
The legal and political aspects of the general environment go hand in hand. They impose certain
constraints on an organization, and the extent to which they are pro or anti-business significantly
influences management policy, and their stability constitutes an important element in long-range
business planning. Legal environment indicates the human actions that the society prohibits and
punishes and the actions that are to be controlled for instance, the production and sale of harmful goods
or employment malpractices. Laws are the ―rule of the game‖ required to be taken by every
organization. As a matter of facts, most organization are set up by law. And at the same time, some
other organizations which are likely performing illegal acts are denied existence by the law. Some of
the law relating to business include, law of incorporation (Like Business Name Act, 1961 and the
Companies Act. 1968), the law of agency, law of personal and real property, law of business
association, and so on.
Political environment represents the actions of government, Government affects virtually every
enterprises and every aspect of human life. The political environment (including legislature and courts)
may be pro or anti-business and this influences government action on such matters as corporate income
taxes, preferential tax treatment or trade tariffs, minority hiring and promotion requirements, consumer
protection legislation, safety standards, wage and price controls, and the relative power of labour and
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management (Mescon et al 1985:110). Some of the above mentioned actions act as constraint to
business while others promote business.
II
Cultural and social environment
Cultural and social differences among cities, for example, Lagos, and Kano; tribes, for example
Yoruba and Igbo: countries, for example, Nigeria and Japan can and do affect the operations of
business. Let us illustrate how cultural and social differences affect business activities.
a) Difference in consumer behavior and preference require product changes and/or different
marketing strategy. Almost all the tribes in this country have different preferences and behavioural
attitudes towards a particular product or service.
b) Differences in behavior and principles will affect business operations. For instance, workers in
most advanced countries such as the USA, UK, Sweden, West Germany, etc. appear to strongly oppose
or respond to authoritarian managerial styles.
On the other hand, employees in the developing countries of Africa, Asia and Latin America
expect their managers and superiors to be autocratic. Studies also show that attitudes of workers are
changing. Generally, younger workers seem to dislike traditional authoritarian relationships and desire
more autonomy and social interaction in work (Miner 1974). Again different publics have expectations
and values about what constitute ethical business practice. Giving bribe to obtain contracts or political
favours, promotion on the basis of favouritism, good fatherism instead of competence, or performance,
making unfavorable remarks about competitors, selling harmful products, etc., are considered unethical
and immoral in some societies, especially in the develop nations. In some other societies, such
practices as a result of differing socio-cultural background, are seen as normal business practice and
may be allowed to go on.
c) The dominant attitudes in a society toward work, achievement, and liability to influence the
future also effect managerial practices. The American attitude to self-determination of being the
―master of one‘s destiny‖ (rugged individualism) is in sharp contrast to the prevailing fatalistic belief
of some Moslem cultures that the future cannot be influenced by one‘s work and achievement (Hichs
and Gullett 1981, 148).
d) Different cultures also place different emphasis on time Managers in America and other
advanced countries operate with heavy schedules and regard punctuality to be very important for
managerial effectiveness and efficiency. On the other hand, some Nigerian managers and indeed other
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Africa managers use the popular and ubiquitous ―African time‖. This is their inability to keep to time.
These groups of managers have forgotten that time as a resource is very perishable and therefore a
scarce commodity. Time is money and time waited cannot be regained (Garba, 2019; Onuoha:179)
e) Finally, socio-cultural factors affect the ways in which an organization can do business. Several
organizations in the world including Nigeria have been forced by social pressures to stop doing
business with South Africa because of that country‘s racial apartheid policies. (Messcon et al: 109110). In examining cultural and social patterns, Nigerian businesses must consider their differences as
well as similarities and adjust their business practices accordingly.
THE ECONOMIC ENVIRONMENT
The economic environment of an organization is a set of economic indicators which influence the
cost of all business inputs and the ability of customers to buy goods and services. Economic
environment can either affect business operations favourable or adversely. In view of this, business
concerns should be aware of them and prepare sufficiently for their impacts.
These economic indicators include: the economic size of the nation, measure by its gross
domestic product (GDP) and gross national product (GNP), its income level (is it growing, stagnant or
declining), economic growth trend and its various stages-glowing, stagnating or declining, inflation
rate (is it normal, high or very high?), balance of payments (favourable or unfavorable)?, financial and
labour institutions (are they adequate or not) and general price levels.
The business should also review the effects of the government yearly fiscal and monetary
policies. Are these policies favourable for business? For example, the abolition of import licensing
replacing it with the Foreign Exchange market and currently with inter-bank
Foreign Exchange Market (IFEM): liberalization of trade, incentive schemes for expert
promotion, deregulation of interest rates in the banking and financial sector, etc., some of these policies
that promote business operations while others do not. Also facilities and services such as availability of
high quality entrepreneurs and managers (or executive capacity), transportation, communication, roads,
electricity, water and housing at affordable rates should be considered by organizations; most of these
infrastructural facilities are in the state of inadequacy in this country, especially in the rural areas
where well over 70 percent of the citizens live. Because of this, Directorate of Food, Roads and Rural
Infrastructure (DFRRI) was set up by the present federal Military Government. The major task of the
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directorate is to provide some of the essential ―missing facilities in our rural areas. These would, of
course, promote business activities in these areas.
Finally, it should be noted that these economic factors are dynamic in nature and largely outside
the control of business.
The Technological Environment
Technology has been defined as the systematized practical knowledge, skills, method, activities
and artifacts, by means of which man pushes back his limitations and extends his capability (Oluyinka,
Shamsuddin, Wahab, Ajagbe, & Enegbuma, 2013; Drucker 1970:70). Managers are generally
concerned with two components of the technological environment: the process of innovation refers to
the efforts in the basic science to develop technologies processes, method, and products (Ikemefuna &
Abune, 2015; Norman & Verganti, 2014; Santos, 2014; Baldridge and Burnham & June 1973, 165-76).
In much organization, this process is carried out though research and development (R& D), the process
of the technology transfer involves taking the new technology from the laboratory to the market that is
the transfer of science to useful products and application (Battistella, De Toni & Pillon, 2016;
Ulterback 1971).
The benefits of technology include increased production of goods and services to the society. It
multiplies the output of a single worker. It leads to increased efficiency of productive factors. It acts to
reduce real prices and results in higher standard of living. Technology has resulted in reduced working
hours, higher salaries and much more leisure time for workers (Oluyinka, Endozo, & Calma, 2018;
Keith & Gubellini 1978 47-8). Business should weigh these benefits against technological problems
which include: large investment in capital goods, increasing the risks involved in obsolescence, traffic
jam, polluted air and water, shortage of energy, loss of privacy through the application of computer.
Finally, technological change has altered the relationship between worker and employer producing
human relations problems of considerable magnitude, particularly in big industries. Management must
pay close attention to technology and technological innovations to keep pace with competitors. This is
very essential to make well informed business decisions for organizations.
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International Environment
In addition to coping with domestic aspects of the general environment, Nigerian organizations
(both profit and non-profit) have to contend with international environment. This is an a result of the
fact that they may have to face competition from outside the country, equipment and may export some
of their products and services. All these transactions take place only with the medium of foreign
exchange which is not within the control of the domestic government. Cultural, educational and
religious exchanges between countries, war and immigration also have international dimensions which
no organization should overlook.
Internal
Environment
Unions
The Organization
vir
on
nt
me
Fig 3.1 Organizational Environment
Eco
n
Regulators
om
ic
E
n
Associates
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Suppliers
ment
nviron
al E
rnatio nal Env iro
Inte
nm
Customers
oci
Competitors
Cu
lt
s
al/
ur
en
t
ical Envi ro n
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Introduction to Business Management
CHAPTER FIVE
ACCOUNTING AS A BUSINESS MANAGEMENT TOOL
INTRODUCTION
Businesses of all sizes need to maintain financial records for smooth operation. Bookkeeping is a
basic aspect of accounting but its definition clearly shows the importance of accounting in a business.
Booking-keeping has been described as the art of keeping transactions in a systematic way so that the
books can reflect the owner(s)'s true financial status at any time, this is basically what accounting
should do but in a more complicated form.
Accounting Defined:
Simply, an account is a folio in a ledger. It also is a statement in financial terms rendered to
indicate to whom one (often steward) is responsible to in all matters relating to his stewardship
(dealing in his master‘s wealth) throughout his responsibility period to discharge him from his
obligations (Faff, 2015). Accounts are normally housed in a ledger, and a ledger is the principal book
of accounting records. In the early evolution of accounting, the ‗diary‘ played this role. An account is a
noun, while to account is a verb (Osuala & Adukwu, 2014).
Many accountants have gone on to define accounting in various ways. We would therefore survey
some of these definitions; Accounting is the mechanism used to calculate and report specific financial
information about an agency or unit's economic activities to different users. The knowledge is
primarily financial and usually defined in terms of money (Alp, & Ustundag, 2009; Harmanson et al.,
1983: 5).
Sizer (1989: 150) tried to bring about the same impact by claiming that "in the broadest sense all
accounting is accounting management, Busco and Scapens (2011) also supported the context. The
financial and value information that accountants produce is of some management interest (Christensen,
Cottrell, & Baker, 2013: 109).These studies argued that management and financial accounting differ
only in the emphasis upon purpose rather than upon techniques
Accounting was defined in several ways; a specific aspect of the subject had been stressed by each
interpretation (Busco, & Quattrone, 2015; Anao, 1989, p.1). Such studies note that concepts of subjects
that have been as realistic and as flexible as accounting are, of course, usually unsatisfactory.
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Notwithstanding this argument, "Accounting can be interpreted in several ways; as an operation carried
out by accountants and their surrogates; as a structure consisting of several interrelated and
interdependent parts; as a management methodology (in the collective sense); and as a study
discipline"
Our analysis will lack some merits if we did not bring to a clear perspective the definition of
Horngren (1987:3). The study notes "An accounting system is a comprehensive way to collect data for
support management and collective decision making in the sense of overall goals or objectives of an
entity. The accounting system is the primary comprehensive information system in almost every
company. An effective accounting system has three specific objectives or ends with information:
i)
Internal reporting to managers for use in routine operations preparation and control
ii)
Internal reporting to managers for use in strategic planning, i.e. making specific decisions and
formulating general strategies and long-range plans; and
iii)
External reporting to shareholders, government and other external parties.
Accountancy is not practiced in a vacuum. I have therefore chosen the foregoing definitions to
achieve some specific objectives in this chapter. The first definition seems to point out that there would
be no accounting unless there are economic resources that are to be accounted for. The second
definition did not want to create any division between the disciplines but wants to focus on the
information provision role of the subject; as the techniques used are essentially the same.
The third definition primarily agrees with the author when he states that many accountants have
their various ways of defining the subject matter. This, however, differs by stating that due to the
dynamic nature of the discipline, attempting to define it is rather unnecessary. Study state that to
understand what accounting is all about, one should observe and understand what accountants are
doing.
In a nutshell, the definition will help to analyze the various roles played by accountants in
different fields of the discipline. The fourth definition portrays systematic nature of accounting by
providing end-users with accounting information. Finally, it states that they are spurred to achieve both
proximate and ultimate goals of the entity being reported on. With all these furrows we believe it is a
management tool which ought to have a focus and purpose.
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Accounting and its main divisions
Bookkeeping is a functional accompaniment to financial accounting. Also, it is confused with
accounting. It is the score-keeping component, in that it systematically tracks all of a unit or entity's
economic activities for a given time period. Financial accounting goes further than that reach. It further
processes the financial data into accounting information, through collation, analysis, interpretation and
reporting on the end product to the end users.
Furthermore, from these we can clearly demarcate the assortment of jobs the accountants and their
surrogates are undertaking to aid management to fulfil their objectives. In the realm of financial
accounting which provides accounting information to both management and the eternal users, we can
isolate financial accountants who are either employed in:
(a)
Public accounting,
(b)
Private industry or
(c)
The non-profit making sectors.
These area of specialization are in auditing, system constituency, budgeting or managerial and tax
accounting. Those who audit are called auditors. Those in the production of the program are called
consultants for managements, those in tax specialists. When a business seeks a loan, or wants its
securities traded on a stock exchange, the financial statements concerning its financial affairs is usually
required. The information users may accept and rely upon statements which have been examined by
auditors who naturally attest that in their opinions that are records are true and a fair representation of
the financial position of the reporting unit. Those who conduct this examination and investigation are
called independent auditors. Their opinions give validity to the reporting entity‘s financial statement.
The advisory group of experts is tax planners. As much as it is legal, the businesses and
corporations advise on the best ways to prepare their tax matters to avoid tax. Proper tax planning
requires that the effect of every business decisions be known and considered before any decision is
made. Yet there is a third category that advises management on the best operations to be adopted.
Perhaps these groups must have gained their experiences from long association with various forms of
businesses. Those accounting related special advice may range from capacity utilization, system
installation, electronic data processing and inventory control systems.
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The accountants provide managers with information for different decision-making positions in the
organization, from the management accounting perspective. These will focus on purchasing processes,
pricing, alternative manufacturing methods, plant construction, policy formulations. These can be
within a span of service or for a long period of time. Also advise on selecting a plan.
Forms of Business Organisation
There are two main organisations in a free enterprise society-business and non-business. Within
the first category studies can easily identify them under four characteristics: sole proprietorship,
partnerships, other loose associations like the cooperatives and companies limited by shares and
guarantees. The church or club or charities are in one category of non-profit organizations, while the
other belongs to government-run organizations and their agents.
If a business is owned by an individual and often managed by that same individual, this is
normally regarded as a sole-proprietorship. Many small service-type of business such as lawyers,
electricians, accountants, physicians and architects, and small retail and manufacturing establishments
are owners managed. Normally, there is no legal, formality in organizing such a business. In this type
of business, the owner is responsible for gains he makes subject to the tax assessment and also to the
losses sustained. Most of those found owning such business find it difficult to distinguish between their
personal property and that of the business. They do not know that business is a different entity from its
proprietor; be it sole proprietor; be it sole proprietorship, partnership or limited liability business.
When we think about group ownership of business we first of all think of those who have
associated themselves, who must not be fewer than two with a view to making profits. The
managements of such business is undertaken by the active partners. A limited member need not be
involved in the firm's management. This form of business is very much regulated by the agreement
drawn by the partners. In this absence, the partners‘ deed must be adopted. In this country this business
is regulated by the following laws: a) the Partnership Act of 1890, b) the Limited Partnership Act of
1907 and c) the Limited Registration of Business Names Act 1916.
In most cases the partners bear losses and share their gains in accordance with the agreement
subscribed to. The organizing nature of this business is that each partner may be held liable for all the
debts of the partnership and the actions of one partner may bind the other partners.
A corporation is a business that is owned by persons who are not fewer than seven persons, and
have complied with the provision of the Nigerian Companies Act 1968 or 1990. This type of business
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is normally managed by professional managers, who are entirely different from the owners of the
business (shareholders). Cooperative businesses are also registered in this country. The membership is
not limited to any specific number. The cooperators may undertake to manage their business together.
In all these business organizations accounting is very necessary for the fact that they handle
economic resources. The accounting process is bound to measure the utilization of these economic
resources. In these businesses the generally accepted accounting principles would apply. Though,
another obvious issue is that these businesses are either involved in providing services, or in trading or
manufacturing. Accounting is also important in all those types of business.
Business Organizations and their Objectives
Modern business firm exist for many reasons. The triune primary objectives of every business
firm are liquidity, solvency and profitability. The interrelatedness of these concepts cannot be overemphasized. This has led some to confuse one for the other. It is generally believed that a firm that is
profitable should be equally liquid and if it is liquid then it will be able to be solvent. These conditions
do no occur at the same time unless where there had been a careful husbanding. Liquidity is ability to
retain an optimal level of cash or near cash resources to meet demands for payout. Solvency is ability
to pay debts as they fall due. Profitability is the capability profile to generate adequate earnings at any
given time. Unless a firm can produce satisfactory earnings, pay its debts as and when due, and
maintain optimal liquid level it may not survive to fulfil other gamut of objectives.
There are three financial statements that reflect a firm‘s solvency, liquidity and profitability.
These are;
i.
Balance Sheet
ii.
The Fund Flow Statement and
iii. The Income Statement.
BUSINESS MANAGEMENT FUNCTIONS
Business management refers to the running of the affairs of business entity by managers who
through their managerial know-how ensure that the enterprise interacts healthily with its environment
for anticipating results. Management strives to ensure the life of the organization as a going concern by
guaranteeing that it stays profitable, liquid and solvent. This they do by painstakingly controlling
planning, , staffing, directing and organizing resources.
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Planning is a crucial executive function. It's a way to prepare a company to deal with the future. It
includes setting the company's goals over various time scales and determining how to reach them. A
long-term plan spans over five years or more while a short-term plan usually is accomplished within
one year period. Top management draws the long range plans from where the operating managers will
base their tactical plans. Since all the departments must cooperate to achieve goal congruence, critical
planning inputs must be derived from them. Such departments that must harmonize include marketing,
personnel, production, finance and accounting.
Organizing is the management function of relating people, tasks and resources to each other so
that an organization can accomplish its objectives. Overlapping of functions is usually avoided and
individuals are assigned to meaningful tasks, authority and commensurate responsibility are given to
guarantee a smooth and friction operation.
Staffing involves hiring, choosing, preparing, developing and encouraging personnel to fill
appropriate positions within the company. Personnel are an organisation's most important resource.
Management ensures that the right caliber of staff is recruited to match job openings in the firms
knowing fully well that a mismatch will be costly to the organization and may be instrumental to its
effectiveness.
Directing means empowering the subordinates to work towards the aims of the organization, plans
and objectives of the organization have to be understood and the performance standard classified.
Directing also ensures that the subordinates are adequately motivated or activated to attain high
performance at a minimum cost.
Finally, the manager must control. Business operations must be monitored to see if there are
impediments to goal attainment. Controlling implies setting standards of performance, measuring
actual performance and comparing it to performance standards to detect deviations from standards and
taking corrective actions when significant deviations exist. Controlling helps management to manage
by exception; that is channeling its efforts towards problem areas highlighted by its controlmechanisms.
Johnson and Stinson (1978: 125) said that managers are faced with problems for which solutions
must be found, they agree with the foregoings: That a business must identify its problem and determine
its cause; develop alternative solution to the problem and select the best alternative and put the decision
into action and follow up.
These are the tenets of Business management.
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Accounting in the process of business management
We have identified the manager‘s tasks. He must necessarily plan for the forecast. He makes
decisions that affect the immediate progress of the business and also during a long-term period. These
plans, forecasts and decisions (both strategic and operations) are matched with the organizational
objectives. He controls his performance by the process of evaluation. In doing all these he needs
accounting information as he seeks to solve his problems. These yardsticks of evaluation are
accounting.
Balance Sheet
The balance sheet is a point in time statement that shows the financial position of the company. It
shows the firm‘s assets, its liabilities and the owners‘ equity. The statement only captures the reality of
the business at the particular day it was drawn.
Assets are things of value that the business owns. In actual fact they are the resources of the
business. These have value because they have utility. They are objects of exchange. Some may also be
intangible. Examples of assets are building, goodwill, patent rights, debtors, cash and stock.
Liabilities are debts owed by the firm or claims that can be made on the firm-that have not
crystallized e.g. a contingent liability. This may come through borrowing, purchasing on credit or
obtaining services on credit with the intention to pay later. Some examples of these are accrued wages,
purchases, creditors and debenture stocks.
The equity of the owner or shareholder's fund represents the owner's interest in the business. It
consists of: the real capital spent the income for the year and any other improper assets. When the
liabilities are added to the equity of the lender, the total assets of the company must be settled upon.
When management wants to evaluate the solvency of the business, the point to start is the
analysis of the balance sheet. In order to illustrate the sort of information that is stored in this point in
time statement a simplified version has been given in figure 4.1 below:
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PAN LTD., BALANCE SHEET AS AT…20xxx
Fig. 4.1 (simplified) Typical Balance Sheet of a company.
In the figure 1 above, a, b, and c represent the company's assets; the liabilities are d and h. The equity
of the owner is represented by e, f, and g. A Working Capital occurs when d is discounted from c.
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Income statement
Income statements are prepared for the purpose of reporting the profitability of the reporting
entity for a stated period of time. Some may refer to this as the earnings statement. Profitability in
accounting is normally measurable in a given period with the costs of the revenue generation.
Revenues arise when goods and services are sold. On the other hand, expenses are incurred when
services and goods are received. To determine income, the expenses of each period must be compared
to the profits of that particular period. If the income exceeds costs, the result is net profit.
On the other hand, if the expenses exceed the revenues net loss results. In business much must be
done to ensure that there is net income in every operating period, in other to sustain the business. So
far, we have been very careful in dealing with the components of expenses and revenue. An illustration
will serve to explain more of these components.
Income statement can also be prepared basically on accrual basis. Some of the items dealt with in
this statement do not involve any in or out flows of funds. Expenses not paid for are recognized, as
well as incomes not actually received. Figure 4.2 has been appended to illustrate some of these issues
discussed.
PAN LTD., Profit & Loss account for the period ended … 20xx
(a)
(b)
Turnover (sales-less sales returns)
xx
Less manufacture, selling and
Distribution costs;
x
Material consumed
x
Wages and salaries
x
Production overhead
x
Selling and distribution
x
(c)
Depreciation
x
x
(d)
Cost of financing
x
xx
(e)
Earning after interest but before tax
(f)
Nigerian company Tax
(g)
Net income after Tax but before extra-ordinary items.
xx
xx
Figure 4.2: Non-compliance model of a financial statement of a manufacturing business
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Statement of Changes in Financial Statement
Funds flow statement provides answer neither the income statement nor the position statement can
provide. This statement reports flows in and out of the business within an accounting period. This
statement answers some of the following questions which impinge upon the liquidity of the business.
How much was spent on new equipment? Was there any capital raised? Were there an increases or
decreases in the working capital? Why not the profit does generated approximate to the working
capital? Why is such a profitable business not able to pay dividends? We have in the above paragraph
used funds to denote working capital, near cash investments or liquid cash. In this way, working capital
represents the difference between the current assets and the current liabilities. This is a critical factor in
the management of the business finances.
However, no matter how this concept of fund is defined, the basic fact is that there are obvious
sources and applications (uses) of fund in a business. All transactions that brought in (caused inflows
of) cash or working capital are sources of fund. On the other hand, all transactions that removed
(caused out flows of) cash or working capital are applications of funds. The major sources of fund in a
firm come from its operations. Sales create inflow of funds, while expenses cause outflows, Fig. 4.3
below goes to classify the major sources and uses of funds in a company.
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POOLS OF FUNDS
Sources of Funds
Application (uses of funds)
Net Income from operations borrowing
Net loss from operations
Injections of new capital
Loan repayments
Disposal of facilities
Redemption of stocks and distribution
Government grant
Purchase of facilities
Figure 4.3: Major sources and application of funds. The statement itself is also a subject matter of figure 16.4
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PAN LTD., Sources and applications of funds statement for the year, ended …20xx.
Figure 4.4: Statement of Sources and application of funds.
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Management Accounting and Enterprise Management
So far, we looked at managing business from the perspective of financial accounting. As earlier
discussed, management accounting is a branch of financial accounting. Again from the definitions
given above, we discovered that any accounting information used or needed by management to reach a
decision is in its simplest implication ‗management accounting‘. We have also discussed the triune
statements that answer the needs of the stockholder‘s questions. Internally, management is complex
and would demand an avalanche of accounting information to be able to operate efficiently and
effectively. Performing management functions would be herculean if not impossible without the aid of
management accounting information.
Foresighted management must plan to conserve cash, maintain profitability, develop survival
strategy and sustain solvency. In doing these, both strategy and operational budget are developed.
Capacity utilization and acquisitions plans are drawn. Standards are developed and performance
yardsticks are chosen.
Management accounting systems are needed in each of these activities to provide ready resources
for the management. Several great management principles like. Management by Objective as well as
Management by Exceptional both derived from Figures Management. Management today must not
operate as if they have limitless resources. Norcross (1968: 78) opined that successful management
must be that which understands the information fed to them and should be ‗cost conscious‘ in the true
sense of the word, Laitinen (2006) supported. It is the prime purpose of management accounting to
school managers to be cost conscious. Any piece of accounting information given to management is to
fulfill this need and purpose.
Merits and Demerits of Accounting as a Business Management Tool
We must now consolidate the points we have made all through this chapter on the merits of
accounting information in aiding business management particularly. For any tool to be useful, it must
be sharp. We have uncovered the following facts in areas where accounting can obviously help
management very positively:
(a) In answering questions relating to the businesses
(i)
Profitability
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(ii) Solvency
(iii) Liquidity
(b)
In handling problems relating to management function such as:
(i)
Budget formulation; regulation and control.
(ii) Standards of performance development.
(iii) Choice of strategies.
(iv) Evaluation of performance.
(v)
Criteria for awards.
(vi) Pricing and inventory related problems.
Demerits of the Tools Provided by Accounting to the Business
Most of these come from bad skills of the operations. No matter the efficiency of any concept and
philosophy, bad management can contribute immensely to the demise of such ideas. Once management
regard the accounting information as a means to ‗control‘ and ‗regulate‘ their activities, there is the
tendency that they may not be utilized. If the accounting information did not arise in the appropriate
quantity and proportion, to the right individual at the right cost, at the right time, its usefulness is
constrained. Management should also be very worthy in the way such quantitative information color or
influence their decisions especially where these affect the work-force. Accounting prepared ‗globally‘
may confuse rather than aid decision making.
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CHAPTER SIX
SOURCES OF FINANCE
INTRODUCTION
Forms of business organizations: sole proprietorship, partnership, cooperative societies and
corporations needed short-term financing in order to operate optimally. Corporations, either smallscale, medium-scale or large scale also require short-term financing for effective operations. It should
be highlighted that non-profit organizations such as churches, government, educational institutions, the
armed forces, charitable agencies, and so on, often need short-term funding in an effort to effectively
and efficiently discharge their work, as do their counterparts seeking profit.
For the purpose of this chapter, our main focus will be on business, that are profits seeking
endeavors.
MEANING AND COMPONENTS OF SHORT-TERM FINANCING
Short-term finance as the name indicates is fund or capital required to meet short-term needs of a
firm. The duration of short-term finance ranges between one day and a year (or 365days), funds raised
from short-term source are generally speaking working capital meant to meet current expenses like
paying wages, replenishing inventory and the like, especially when self-generated funds are inadequate
(Sanchez-Cervantes, Alor-Hernández, del Pilar Salas-Zárate, García-Alcaraz, & Rodríguez-Mazahua,
2018; Onuoha, 1991).
Short-term finances are also called current asset. By accounting definition, current assets are asset
that are normally converted into cash within one year. Working capital management is usually
described as involving the administration of these asset-namely, cash and marketable securities,
receivables and inventories- and the administration of current liabilities.
The term liquid assets is also used to mean short-term financing. Liquid assets that are readily
converted into money are used to characterize money and assets. Different assets display varying
liquidity rates. For example, money is the most liquid of assets (Berentsen & Schar, 2018: 97-106;
Solomon,, Alina, Eta, & Ajagbe, 2014).Van Horne (1983, 324) is of the view that apart from money
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which is the most liquid asset, that other assets have varying degrees of liquidity, depending upon the
ease with which they can be turned into cash. The study further states that for assets other than money,
liquidity has two dimensions:
i.
The time necessary to convert the assets into money and
ii.
The degree of certainty associated with the conversion ratio, or the price for the assets realized.
In order to ensure effective management of short-term finances, growing business concern should be
sufficiently aware of the short-term and recurring existence of its current assets and efforts to maintain
a level of liquid assets that will be most profitable for the company. This is because inadequate or
excessive working capital is unhealthy for effective business operation.
SOURCES OF SHORT-TERM FINANCES FOR NIGERIAN BUSINESS CONCERNS
No matter what form and size of business one is operating, there is need to have sources of finance
available to it. No business can function optimally without funds, especially working capital (i.e shortterm funds). Generally speaking, there are two broad source of short-term finance for Nigerian
business concerns: Internal and External sources.
(a)
Internal Sources:
As the name suggests, this means that these funds come from which the firm as opposed to eternal
sources. The internal short-term sources of finance available for business include the following:
i)
Retained Earnings
Retained earnings can be defined as that part of the firm‘s after-tax income (profit) which is
retained in the organization as opposed to being given out or distributed as dividends to shareholders. It
can also mean profit not appropriated by owner(s). in the case of proprietorship and partnership, the
decision to retain earning within the firm will be predicated on much factors as the current earning of
the firm and its stability, the firm‘s dividend record, rate of taxation, liquidity position of the firm, the
degree of control the existing shareholders want to maintain and the cost of obtaining funds from other
sources as well as government policy on dividends (Ozkan, & Ozkan, 2004; Ogbulu, 1967: 2).
Nonetheless, it should be remembered that retained earnings can be used for both short- and longterm purposes by businesses. Maintained earnings are usually intended to meet financial contingencies,
finance capital investments and support growth and diversification. All these goals are aimed at
eventually increasing profits (La Rocca, La Rocca, Gerace, & Smark, 2009; Onuoha, 1987:10).
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The basic objection in profit retention has been that retention hinders the free working of the
capital market and this has given rise to the misallocation of resources. The fact that a business makes
profit is not proved that it is efficient; it may do so by virtue of its size, or through patent protection, or
via government policy towards its products. At the same time, there may be other, better run and
potentially more lucrative companies that cannot grow because they are unable to access the capital
they need, either at all or under acceptable terms (Rouanet & Halbert, 2016; Hemingway, 1976: 23).
In other words, in each year, all the profits should be shared out to the shareholders to enable them
to invest on other firms if they wish. Only sums needed to finance replacement of asset in periods of
inflation and any sums required to redeem maturing debts should be reserved. Companies would then
have to bid, at the going market rate, for whatsoever funds they needed to finance expansion and
development. As a result not only would shareholders have more say in the spending of their own
money, but managements of business concerns would be kept on their toes because funds, that is, real
resources would flow to the firm offering the highest returns.
Despite the objection raised in the preceding paragraph, Onuoha (op.cit.141) maintains that
retained earnings constitute a reasonable portion of both short term and medium/long term funds for
Nigeria businesses especially, the small scale ones which may be handicapped (as a result of low credit
rating) when competing for external sources of finance with the medium and large scale business
concerns.
ii).
Accrued Taxes
Delaying the payments of taxes to the tax authority (i.e. the board of internal revenue) could
represent a sizable short-term source of funds, and usually interest free. However, care should be taken
so that the delay does not infringe any tax laws. Deferred payments of taxes enable business concerns
to use substantial amount of fund to meet their short-term commitments particularly, present corporate
tax rates of between 40 and 45 percent. Delay in tax payment until a final demand as made by the
Inland Revenue Department does not attract interest charges. In the same way, some lawful delay in
playing over delay withheld taxes on rents, dividends, interests, and royalties to the relevant tax
authority could provide a short-term source of free finance (Richter, Samphantharak, & Timmons,
2009; Ezejelue. 1987:7)
iii). Accounting Methods
The accounting method in use could, give some tax advantage. For instance, the use of LIFO
methods of inventory valuation during periods of rising prices could have the effect of postponing tax
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payments by inflating the cost of goods sold and thereby reducing income chargeable to tax at the time
being. But the use of LIFO method has the opposite effect. Therefore by postponing tax payments,
LIFO provides free money for the organization to use. The use of the accrual or cash accounting
method, as well as the basis for identifying income in accounts, will also have the effect of moving
income from one year to another, thus, either varying or increasing tax payments. This idea of
postponement of tax is important to the business if the business is in great need of temporary working
capital.
Provisions for such items as bad and doubtful debts, future tax liabilities, depreciation, etc., do not
involve an immediate out-flow of cash and to that extent represent a short-term source of funds.
Furthermore, where such provisions are tax deductible, they reduce the current year‘s tax liability and
hence increase the firm‘s current income (Richter et al., 2009; Ezejelue, 1979: 398-409).
(b)
External Sources
The external short-term source of fund available to Nigerian business organizations is many and
varied. These eternal rules include private loans, bank overdraft and loans, trade credits, debt factoring
and invoice discounting, bills of exchange, government subsidies, inter-company loans, and the money
market.
i).
Private Loans
Private loans are funds raised from the informal capital market suppliers in this market include
family, friends, private money lenders, traditional thrift and credit societies like the issue, age groups,
union and clubs. In this market, activities are personalized and characterized by face-to-face
negotiations between the borrowers and the suppliers of funds. Interest charges are not uniform; some
are very low and other very high. Private loans can constitute a very reliable source of short-term funds
for business, especially in the sole proprietorship and partnership categories.
Private sources of funds have a lot of benefits. The system is very flexible in that repayment could
be rescheduled if the need arises. In most cases collateral securities are not required. The personal
character and integrity of borrower seem to be very critical in determining whether a loan request
would be granted or not.
A major short coming of this market is that funds raised from it may be inadequate, thereby
necessitating the need to look for extra sources of funds. This is because loan syndication is nonexistent in the market. However, small business enterprises benefit more from these private sources
than any other form of business organization.
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ii). Bank Overdrafts and Loans.
Commercial banks play a very important role in providing short-term funds for business to
finance their working capital items. This they do by extending and granting of overdraft and loans
facilities to business and customers that operate current account with them, and that have high credit
rating. This precaution is taken to reduce the risk of default (Onuoha Op.cit. 143). An overdraft is a
loan facility granted by banks to their customers for a given time to overdraw their account by an
agreed amount. The advantage of overdraft financing is that it is simple, cheap and flexible. It is also
granted without collateral. An overdraft is usually considered to be preferred to a loan, since interest is
payable only on the overdrawn amount, whereas with a loan, interest is payable on the whole amount,
whether or not it is used in its entirety in the business (Pizzey 1985:300-310).
The rate of interest payable on such short-term facilities offered by the bank depends on the
credit-worthiness of the borrower, and is also linked to the minimum lending rate of the bank. In some
cases commercial banks require security for a short-term loan, and with a small business, it may be that
the security needed is a guarantee on the part of the proprietor to repay the loan if the business fails to
do so.
In this way the banks can avoid the difficulties they would encounter if once they had lent money
to a company, the owner of the company claimed protection as a shareholder under the limited liability
rule. Finally, it should be emphasized that Nigerian business concerns should use draft and short-term
loans to finance only their working capital requirements and not for long-term projects.
iii. Trade Credits
Trade credits constitute a common source of short-term finance. This is made possible because
most suppliers of the goods and services that business concerns use in their day-to-day operations often
do not insist on immediate payment. The usual practice is for the customer to be allowed to pay for
these goods and services sometimes after the actual receipt. This represents a form of credit which
usually lasts between two and four weeks. This short-term of relief may enable the business to
conserve some liquid funds. Careful timing of purchases may also help to provide temporary
accommodation.
To avoid denting their credit rating Nigerian Businesses should endeavour to meet agreed credit
terms of face the reluctance of suppliers supplying the much needed materials without immediate
payments of previous bills. Another problem of defaulting on agreed forms is its chain reaction. The
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reputation of being labeled a ―bad payer‖ can endanger relations with other suppliers and other
members of the public.
Trade credit is not costless. The suppliers, in order to compensate themselves or their capital
being tied down via trade credit include the cost of credit in their prices or offer a cash discount for
prompt payment. The cost is represented by the cash discount offered, that is the difference between
cash and credit prices. The terms used might sound thus: ―6% twenty days, net 30‖. This implies that if
the buyer pays for the goods within twenty days of the billing date, he will deduct 6% o the price. If the
interest to be charged by borrowing from other short-term sources, like the bank, for the short period, is
less than the loss of cash discount or loss of credit reputation: it will be a better approach for business
to do so. Finally trade credits represent the single most important source of short-term funds,
particularly or the small-scale business firms.
iv.
Debt Factoring and Invoice Discounting
Factoring is a process by which a firm‘s debts (mostly accounts receivables) are sold to an agent
of another firm called the factor on a regular basis. The factor then owns these debts and operates all
the sales accounting records-keeping accounts posted, maintains credit control mechanisms, following
up bad debts and pressing for their recovering. The factor is about 1 and 2 1⁄2 per cent of the selling
value for a service charge. Factoring has two important benefits: (i) instead of large number of
relatively small payments from its customers, spread over time, the selling organization gets a lump
sum of money at regular intervals from the factoring organization. (ii) The problem of maintaining
numerous paper works on account receivables and bad debts is saved the selling organization, while
short-term funds are made available to it by the factor.
Invoice discounting on the other hand is the method by which a supplier after making goods and
service available to a customer, sells the invoice to a discounting firm that buys them at a value less
than their face value and pays for them at once. A repayment guarantee for the amount involved, or the
supplier understands that all the sums received from his customers would be paid into the discounting
firm‘s bank account. The advantage a firm or supplier gains by discounting its/his invoice is a quicker
inflow of cash which can then be used for working capital requirement.
v.
Bills of Exchange
Section 3 of the Bills of Exchange Act 1882 defines a bill of exchange as ―an unconditional order
in writing, addressed by one person to another, signed by the person giving it, requiring the person to
whom it is addressed to pay, at a fixed or determinable future time, a sum certain in money to, or to the
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order of, a specified person or to bearer‖. In other words, a bill of exchange is a kind of postdated
cheque. The company owing the money accepts‘ the bill, by writing accepted on it, and when it is due
for payments (i. e when it matures) the amount plus interest is paid to whoever holds it. The company
which has right to payment on the bill can sell or negotiate‘ the bill with a bank or any other person or
institution. In so doing, it will sell at lower than face value, thus discounting the bill (Vause
&Woodward, 1981:104). Bill of exchange enables firms to get funds in advance of the actual due date.
Bills of Exchange can be made use of by both small and big business organizations, to raise the
necessary short-term funds for their working capital needs.
vi ). Government Subsidies
A subsidy is merely a tax in reverse. It is direct or indirect payment in cash or kind by government
to different private citizens or groups plus cash value of provision of the goods, services, fees and loans
(which do not reflect the full competitive market value) plus cash value of all tax exemptions
(Egbuonu, 1987; 2) Government subsidization is a form of government expenditure. In developing
countries like Nigeria, education, public health and medicine, transport, agriculture, industrial
development, energy, communication are the main fields in which government provides subsidies.
Subventions for etc. are categorized in different forms and some include:
(a) Grants: Usually given to producers of goods and services on necessary consumption by
government to offset cost increase so that these firms will not have to raise price and increase the
cost of living and thereby set off (demand for) increase of general wage.
(b) Loan guarantees:-Under a loan guarantee, the government assures the creditor that the loan he has
made will be service and repaid, if necessary by the government itself. Although no money may in
fact need to be paid by the government has nevertheless granted a subsidy.
(c) Tax Reductions: - Subsidies in the form of tax reduction all households or business firms to reduce
their tax liabilities some fraction usually far less than 100 percent of the amount of the stipulated
type of economic activity.
(d) Cash Subsidies:-These are outright subsidies made in cash unlike tax reductions, cash subsidies
need to be entered the budget as government expenditure.
(e) Interest Free Loans:-These are loans given without an interest amount or fraction fixed to it, i.e.
the borrower takes on a loan from the government for a period of time and then returns exact
amount that he borrowed at the maturity period. Interest free loans are usually given by government
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to interest enterprises or individuals to encourage them to adventure certain economic fields that
they would not if such an offer not made.
(f) Tax Reliefs:- Subsidies in the form of tax reliefs allow households or business firms to reduce tax
liabilities by 100 percent. This implies waiving tax payments on an economic activity. The reliefs
are granted when government wants to encourage adventure into an area of activity. It may also be
granted to small or young firms temporarily to give them a chance to stand on their feet. In Nigeria,
subsidies do constitute a reasonable volume of short-term funds for businesses especially in the
preferred sectors of the economy. For example, in this country today, we are aware that
governments (Federal and States) subsidize agriculture, housing, transportation, postal services,
imports and exports, telephone services, electricity, fuel, and so on.
vii). Inter-company Loan:Sometimes, companies or businesses that have temporary fund surpluses may lend them to those
other businesses with temporary shortages. But because of the prevailing economic down turn in the
country, this source of funds appears unreliable since most companies/businesses are affected by the
same cash crunch.
Again with the high depreciation of the Naira (the nation‘s currency), here have been substantial
increases in the prices of imports especially industrial raw materials, agricultural, inputs, transport and
construction equipment, etc. all these have resulted in increases in the cost of industrial and agricultural
production, as well as transportation and construction. The recent increases in the prices of petroleum
products by the Federal Government will also have the same effect.
Hitherto, inter-company loans have served as a common source of funds for many incorporated
business concerns in Nigeria, especially in the commercial and manufacturing sectors.
viii The Money Market:Another important source of short-term funds for business is the money market. Stigum (1985,
185), defines the money market as a wholesale market for low-risk, highly liquid, short-term IOUs. It
is a market for various sorts of debts securities rather than equities. In other words, the money market
is essentially a market for short-term loans. Surplus funds are lent out to the market for varying period
ranging from overnight, a full-day, a forthnight and three months. Some cases, the lending time may be
longer. Short-term capital is importance to public authorities, industry and commerce. The money
market instruments applied so far in Nigeria include the following Treasury Certificate, Call Money,
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Funds Scheme, Commercial Bill Certificates of Deposits (CDs), Bankers‘ Unit Funds and Eligible
Development Stocks.
Over the years, the Nigerian money market through the about mentioned instruments have been
able to supply or provide millions of Naira to governments (Federal and States), government agencies
and business concerns. Yet many other business particularly the categories of sole proprietorship,
partnership and private limited liability outfits, are not aware of its existence. Two major factors
account for this unawareness. First we read and hear little about the market. Second, people are aware
of the money market as it is a market that few companies experience in their everyday activities and in
which the general public never participate (Stigum) 184-185.
Apart from providing a means by which the surplus funds of cash-rich corporations and other
institution can be funneled to banks corporations and other institutions that need short-term money, the
money market plays other essential economic roles. In the money market, he federal government can
fund huge quantities of its debts with ease. It provides the Central Bank Central Bank of Nigeria, an
environment where market operations are to be performed with the goal of controlling interest rates
and increasing money supply. The varied activities of money market participants often decide the
nature of short-term interest rates, for example, what the yields on various maturities of Treasury Bills
are, and how much commercial paper issuers have to pay to borrow. The latter rate is a significant cost
to many corporations and will have to pay on the loan in particular on time.
Efficient money markets world over been found to possess certain salient features and the
Nigerian money market should endeavour to have them if it has not. These features as identified by
Stigum (185-186), include the following; first and most obvious, it is not one market but a collection of
markets for several distinct and different instruments. What make it possible to talk about the money
market is the close interrelationships that link all these markets. A second salient feature is the
numerous and varied types of participants, Borrowers in the Nigerian money market include banks,
CBN, corporations of all types, government (Federal and States), and other Federal agencies, dealers in
money market instrument, etc. the lenders include almost all of the above plus insurance companies,
pension funds-public and private, and various other financial institutions. And often standing between
borrower and lender is one or more of a varied collection of brokers and dealers.
Another key characteristic of the money market is that it is a whole-sale market. Traders are big,
and the people who make them are almost dealing for the account of some substantial institutions.
Because of the sums involved, skill is of the utmost importance, and money market participants are
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skilled at what they do. In effect, the market is made up by extremely talented specialists in very
narrow professional areas.
Another essential characteristic of the money market is honor every day traders, brokers, investors
and borrowers do hundreds or millions of Naira business. The motto of the money market is my word
is my bond. Of course, because of the pace of the market, mistakes do occur, but no one ever assumes
that they are international, and mistakes are always ironed out in what seems the fairest way for all
concerned.
The most appealing characteristic of the money market is innovation. Compared with other
financial markets, the money market is lightly regulated. If someone wants to launch a new instrument
or to try brokering or dealing in a new way in existing instruments, he does it. And when the is a is
good which it often is, a new facet of the market is born.
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Sources of short-term Financing in Nigeria
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CHAPTER SEVEN
INSURANCE AND RISK MANAGEMENT
INTRODUCTION
This chapter recognizes the fact that risk, is a bane to economic progress. Its influence is more
pronounced in recessionary environments like Nigeria. For risk minimization, the economic entities
need to grapple with the subjects of insurance and Risk Management:
―My ventures are not in one bottom trusted, nor to one place: or is my whole estate upon the
fortune of this present year.‖(Antonic: The Merchant of Venice Act. 1). Antonic, evidently a shipowner and import-export merchant, thought himself secure, because even if one or two of his ventures
miscarried, he would still not be ruined. Yet in later acts of the play, he had unpleasant moments, after
it was reported that all his ventures had foundered in one way or another. His, was a crying case for
insurance.
Shakespeare, who wrote the play in 1596, could not advance the excuse that insurance was not
well known at the time, for only five years later, in 1601, the preamble to an Act of parliament, drafted
in word which has never been bettered as a statement of the operation and purpose of insurance, said:
―Whereas it both been time out of mind, a usage amongst merchants, both of this realm and of foreign
nations, when they make any great adventure (especially into remote parts), to give some
considerations of money to other persons (which commonly are in no small number): to have from
them assurance made of their goods, merchandise, ships and things adventured, or some part thereof: at
such rates and in such sort as the parties assured and, can agree, which course of dealing is commonly
called a policy of assurance: by means of which policies if assurance it cometh to pass upon the less or
perishing of any ship: there followeth not the undoing of any man, but the loss lighteth rather easily
upon many, than heavily upon few, and rather upon them that adventure not than these that do
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adventure, whereby all merchants, especially the younger sort, are allured to adventure more willingly
and more freely‖(Cummins, & Santomero, 2012:43; Cockerell, 1976; 3-4).
‗The loss lighteth rather easily upon many than heavily upon few‘, is the essential feature: the
insured person transfers from his own shoulders, the financial burden of some potential misfortune to
the broader shoulders of the insurers by collecting a sufficient number of premiums, rely on the
probability that only some of the losses they insure against, will in fact occur within any period
Therefore, they believe they'll be left with income. He insured, on the other hand, having exempted
themselves from certain types of worries by means of insurance, is better able to risk his capital in
trade, because he knows that certain fortuitous incidents which he cannot manage, such as fire, will not
cause him to lose his investment.
Insurance has therefore been defined as a social device, providing financial compensation for the
effects of misfortune, the payments being made from the accumulated contributions of all parties
participating in the scheme (Aina & Omonona, 2012; Hansell, 1978, p.1). The success or failure of the
insurer and insured greatly depends on the adequacy of their risk management policies. Consequently,
this chapter is designed to search into Insurance and Risk Management.
Main areas of focus include an overview of Nigeria's insurance business: insurance forms and
basic principles. Others are the Risk concepts: Insurance risk forms and sources: insurance and risk
management.
INSURANCE BUSINESS IN DEVELOPMENT: NIGERIAN
Insurance business started in Nigeria in 1921, with the establishment of the Royal Exchange
Assurance (Adesina, 2015; Ajayi and Oji: 1981, p. 67). It was to remain the only insurance company
until 1949, when three others were established. According to Okigbo (1981, p. 155), the Royal
Exchange concentrated in Nigeria on fire insurance during this earlier period, since this was the main
source of premium income (Adeyele, 2011). But it branched into general accident insurance so that by
1927, it was already receiving some $56,000 in premium income (Cogan, 2017; Supple, 1970 pp. 472474).
The first indigenous insurance company was established in 1952 by the then Western Region of
Nigeria. The Company, The Nigerian General Insurance Company, is still one of the leading
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Companies in Nigeria today. Thereafter, the number of Companies transacting one form of insurance
business or the other, started to multiply. This gave birth to many mushroom insurance Companies and
consequently led to the lowering of the standard of insurance practice within the market. As put by
Etuk and Quansah (1986, p. 134)‖ ―There was, a high degree of proliferation of mushroom insurance
firms, such that fraud and other abuses inimical to insurance practices became rife. There were cases of
agents defrauding members of the public and insurance firms refusing to honor claims filed by their
clients‖. These were some of the maladies that affected the Nigerian insurance industry, before the
introduction of legislative measures by government to control the activities of insurance firms.
The first of such measures was the Insurance Act, 1961 which required that every insurer, must,
besides incorporating the firm, also have been registered. Since the Act has been replaced by a more
comprehensive Act, it is necessary to examine some of the major new provisions, in order to see how
they control and regulate insurance business in Nigeria.
The Insurance Decree, 1976
The most significant step undertaken by the Federal Government to ensure effective control of
insurance companies, their agencies and brokers is the promulgation of the Insurance Decree, 1976
(Uzoaga, 1981, p. 242). The purpose of the Decree is to ensure that insurance companies conduct their
businesses in the best interest of the insuring public and the national economy. To this end the decree
has provided among other things, the conditions for the registration of insurance brokers, review of
premium rates, administration and enforcement and filling of annual reports.
The Decree stipulates that only a limited liability company, a cooperative society or a mutual
company could be permitted by the Director of Insurance to operate any class of insurance business in
Nigeria. For the purpose of the Decree, business is divided into two broad classes namely – Life
Insurance and Non-Life, each of which is subject to separate application, registration, capital and
reserve requirement. For the operation of a life and non-life insurance business, a minimum paid-up
share capital of $1429and $ 875.4 respectively must be deposited with the Central Bank. Where an
insurer carries on both classes of insurance business, separate and distinct accounts must be maintained
in respect of each of these classes of insurance.
In respect of reserves, the insurer is required to set up and maintain specified reserves. For nonlife insurance businesses, the reserves comprise (a) reserves for unexpired risk of 45 percent of total
net premiums, (b) reserves for outstanding claims to total estimated amount of 20 percent of the
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estimated amount of outstanding claims incurred but not reported at the end of the last preceding year,
and (c) contingency reserves representing a minimum of 3 percent of total premiums. In the case of life
insurance business, the insurer is required to maintain two types of reserves: (a) a general reserve fund
to the net liabilities on policies in force at the time of the actual valuation: and (b) a contingency fund
equal to 1 percent of premiums.
With respect to investment of insurance funds, the Decree requires every insurer to invest and
hold in Nigeria, assets equivalent to a minimum of the amount of funds in such business, as reflected in
the balance sheet and revenue account of the insurer. Such investments shall be held in specified
securities such as:
a)
Government and other securities specified under (Local Trustees Powers) Act and
the Trustee
Investment Act, 1962.
b)
Shares in registered cooperative societies.
c)
Loans to building societies approved by the commissioner.
d)
Loans to real property, machinery and plant in Nigeria.
e)
Loans as life policies within their surrender values.
f)
Cash on deposit in or bills of exchange accepted by licensed banks.
g)
Such other investments as may be prescribed.
Over the years, it has been observed that the pattern of investment of insurance company funds
in Government Securities has declined in favor of stocks, shares and mortgage loans (as shown in
Table 1) below. Among the reasons for the shift are the paucity of prescribed government securities in
which insurance funds could be invested. There is also the right interest rate structure applicable to
public security issues, as against the more flexible and more attractive rates offered to potential
investors by corporations in the private sector.
TYPES OF INSURANCE
The Insurance Decree 1976 in Nigeria classifies insurance into categories namely Life and NonLife Insurance.
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I.Life Insurance
Providing for one‘s dependents has been a consideration of all prudent men throughout the ages.
Doing this or at least providing the cost of one‘s funeral on a collective basis was a concept of the
ancient world. Life insurance therefore exists to prevent loss of income which arises when an income
producer dies prematurely.
A great variety of contracts are offered by life assurers. These are variously discussed below:
a) Whole Life Insurance: - As the name implies, this policy lasts for the whole life of the insured, the
sum being paid at death only. Commonly, the insured pays premium monthly or annually up to a given
age, say fifty five or sixty and then premium payment ceases. There is no element of investment in the
policy. It is most suited to the family man, who wants to provide for his death.
b) Term Insurance: - This is the form of policy, payment only being made by the insurer if the
insured dies within a specified period.
c) Endowment Insurance: - An endowment policy pays the insured a specific amount, at a specific
future date. Let us consider a $30; 20 year endowment policy to a man now aged 30. He will get $30 at
the age of 50 if he survives to that age, but if he dies any time before age 50, his beneficiary will
receive the $30 immediately after his death. The endowment policy is frequently sold as combined
savings program, to help sons and daughters with their education and the insurance program to
guarantee that funds for education will be there in the event the parent dies before the children reach
college age.
d)
Annuities: - Strictly speaking annuities are contracts of life insurance. They are a form of
pension, whereby, in return for a certain sum of money, the insurer agrees to pay the annuitant an
annual amount for a specified period or for the remainder of the annuitant‘s life. There are various
forms of annuity:
Annuity for life: This means that the annuity is payable for a fixed number of years, even if the
annuitant dies before the period is complete.
Annuity certain: This means that the annuity is payable for a fixed number of years, even if the
annuitant dies before the period is complete.
Guaranteed annuity: This annuity is payable for a fixed number of years or until the annuitant
dies, whichever comes later.
Reversionary annuity: Payment to the annuitant does not commence until the death of another
specified person.
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Joint and Survivor: Two persons are named as the annuitants and on the death of one of them,
payments are continued to the other.
II
Non Insurance Life
Property and Liability insurance: -The Property and liability insurance field provides protection
against financial losses to property and against law suit. Most things insured against in this category
would be considered accidental, though theft is a certainty not an accident to the thief. Negligence of
some type is normally argued in liability cases.
Accident Insurance: - Accident insurance enables one to understand and appreciate more easily,
the important role insurance plays in handling business risks. The accident insurance is more of the
following classes.
a.
Personal accident and sickness insurance.
b.
Fidelity guarantees insurance.
c.
Employers‘ liability of workman‘s compensation insurance.
d.
Public liability insurance.
e.
Motor insurance.
f.
Livestock insurance.
g.
Rainfall insurance.
h.
Multiple peril and fire insurance.
Personal Accident Insurance:This form of accident policy is provided for the payment of a
specific amount to the insured, in the event of accidental happening to his own person.
Employers Liability Insurance: Employers of labor are under the common law, liable to their
employees for occupational injury or occupational disease. The employers‘ liability insurance is
therefore designed to indemnify the employee in respect of these legal liabilities.
Sureties and Fidelity Insurance: Generally provides a guarantee that a certain course of action
will be carried out. This may be serious financial losses to one party to a contract. In such a case,
insurance may be required to protect one party to a contract from loss, if the other party should fail to
complete work as agreed upon.
Motor Insurance: In Nigeria, this is the largest class of business in terms of volume of business.
The risks which a typical motor vehicle owner might like to insure against are the risks of damage to or
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destruction of the motor vehicle itself: the risk of being called upon to pay damages to third parties for
injuries done to them or for damage to their property arising from the use of motor vehicle: and theft of
the motor vehicle itself. This last risk does not belong to accident insurance.
In Nigeria, there are mainly four kinds of motor insurance policy: the third party policy, and the
―Act‖ policy. It is mandatory that every motor vehicle owner in Nigeria carries a minimum cover of at
least the ―Act‖ policy.
Credit Insurance:The insurance cover here protects traders from default by customers buying
goods on hire purchase or similar credit facilities.
Rain Fall Insurance: This is not yet popular in Nigeria. This type of policy provides a specified
benefit to the insured in the event of at least a specified amount of rain during a particular period.
Marine Insurance: Marine insurance is an important and essential feature of the modern
international business. Goods have to be transported from continent to continent. During voyage by
sea, the ship, cargo, freight and profits are exposed to various hazards. Therefore, the purpose of
marine insurance is to protect the ship owner and all concerned against all these perils. The following
are the main divisions of marine insurance: i) Cargo Insurance: This is the insurance taken out to
cover goods and merchandise carried by the ship against loss and damage, ii) Hull: This relates to
insurance of the actual vessel and its machinery. Such policies are normally arranged on annual basis
and would cover all perils of the sea.
Freight Insurance: This insurance covers the loss of the freight, in the event that the cargo is lost
or is for any reason, not delivered to its destination. Freight in maritime language means the cost of
transporting. This type of insurance applies when the freight is only paid on delivery of the cargo.
When the freight is pre-paid, then it is added to the value of the cargo and therefore insured under the
cargo policy.
Fire Insurance: The fire insurance is designed to cover the policy holder against the loss of or
damage to the insured property resulting from accidental fire. Different types of fire covers are being
sold by the insurance combined policies and consequential loss policies.
(i)
Standard Fire Policy:This policy covers the insured property against accidental fire damage to
the insured property which could be a private dwelling with its contents or a business premise with its
contents. It also covers damage by lightening.
(ii) Special Perils Insurance: The risks under this are those which are covered under the standard fire
policy though they are insurable.
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(iii) Combined Policies:These are policies which cover not just one peril, but many perils. In other
words, this type of fire policy may cover all the perils mentioned under the standard fire policy and
under the special perils policy mentioned above.
(iv) Consequential Loss Policies: When fire occurs on a business premises and materials and
machinery are burnt, the fire policies mentioned above will adequately provide for the replacement of
the materials and machinery. However, there are other consequential problems such as disruption of
business activities and lack of production while repairs are being mad. Consequential loss insurance or
loss of profit insurance is out to take care of these consequential risks.
(v)
National Insurance: National Insurance or social insurance is administered by the state to cater
for the welfare of its citizens that may suffer some social misfortunes beyond their control such as old
age, unemployment or sickness. In Nigeria, the only scheme which can be referred to as a social
insurance of a sort is the National Provident Fund Act of 1961, by the Federal Ministry of Labor.
BASIC PRINCIPLES OF INSURANCE
a. The Insurance Contract
There are two basic types of contract in Insurance. These are the simple and specialty contracts.
i.
Simple Contract: These constitute the great majority of insurance contracts. They do not
necessarily have to be in writing and they are issued under hand, not under seal.
ii.
Specialty Contract: The most important features about specialty contracts in insurance are that
they must be: (a) in writing (b) issued under seal.
iii. Although comparatively rare in insurance, these contracts are found in fidelity guarantee
insurance, with various types of banks.
b.
Insurable interest
The insurable interest may be defined quite literally as ―a financial involvement which is able to be
insured‖ (Culp, 2011:89; Hansell, 1978, p. 142).The essentials of insurable interest are as follows:
(i)
There must be life, or limit, property, potential liability, rights or financial interest capable of
being covered,
(ii) Such life or limit, in (a) above must be the subject matter of the insurance.
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(iii) The insured must be in a legally recognized relationship with the subject matter of the insurance,
whereby he benefits from its continued safety or the absence of liability and is prejudiced by its
damaged or destruction.
It has been said that utmost faith requires each to tell the other ―the truth, the whole truth and
nothing but the truth‖ about the proposed contract. Failure to reveal vital information, even if not asked
for gives the aggrieved party the right to regard the contract as void.
c. Indemnity
Indemnity restores the insured, to the same financial position (after a loss) as he enjoyed
immediately prior to the loss. More simply, indemnity may be defined as an exact financial
compensation.
(i) Cash indemnity: This is the most obvious and in some ways, the most suitable method of claims.
Indeed with liability claims, that is the only practicable method available, if payment is made to the
policy holder in reimbursement of outlays to third parties.
(ii) Replacement indemnity: It is sometimes advantageous for the insurer to replace an article rather
than to pay cash. With a very new item or with such things as jewelry and furs, depreciation is likely to
be negligible and the insured may well be content with a new replacement, which might possibly be
acquired at a discount from the appropriate dealer.
(iii) Repair indemnity: An adequate repair constitutes an indemnity. This form of settlement is
particularly common in motor insurance, where the insurer settles the repair bill directly with the
garage concerned.
(iv) Reinstatement indemnity: This is a term usually found in fire insurance and concerns the
restoration or rebuilding of premises to their former condition. This can lead to difficulties, if the
insured is not happy about the standard of work, but in some circumstance, the insurer may be required
to pay policy money in respect of reinstatement as opposed to their methods.
d. Subrogation
This term is derived from two Latin words: sub meaning ―under‖; and rogane, meaning ―to ask‖.
Thus subrogation means: asking (for a payment) under another‘s name. Subrogation rights are acquired
by insurers once they have provided their insured with an indemnity, and at common law, any action to
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recover from third parties must be conducted in the name of the insured. The main ways in which
subrogation rights may arise are as follows:i) Subrogation arising out of tort: A tort is a civil wrong, the most common type being negligence
and insurance. The former is the most frequent cause of subrogation right arising in connection with an
insurance contract. An example in fire insurance would arise if a painter fails to take adequate care
when using a blow lamp and sets fire to the insured‘s premises.
ii)
Subrogation arising out of contract: It may be that a third party is bound by contract to make
well, any loss sustained by the insured, irrespective of any evidence of negligence. The insurer is
equally subrogated to any contractual rights possessed by the insured, which will diminish or
extinguish the loan. Examples of subrogations arising under contract are: Goods damaged whilst in the
custody of a common carrier. The contract of carriage will automatically involve the carrier in some
liability for damage to goods in his custody, irrespective of negligence. Tenancy Agreement: It
sometime happens that a contract of tenancy contains a covenant or binding agreement, that the tenant
will make good any damages however caused.
Rental Agreement: It is common for hiring contracts. It stipulates that the hirer is responsible for
any loss or damages to the appliance, however arising.
iii)
Subrogation arising from statue:In a few cases, Acts of parliament give subrogation right
which might otherwise not exist. Examples are:The Riot (Damages) Act 1886,The local policy authorities are responsible for peace and order
within their jurisdiction, where now damages has been caused within the scope of the Act, an insures
who makes payment in respect of such damages, has a right of recovery and may proceed against the
police authorities in his own name .
Subrogation arising out of salvage: considered as a factor in assessing indemnity or as a source of
subrogation rights. Where the insured is paid, as for a total loss without any account being made of the
monetary of the remains of the insured article, it may be said that subrogation rights arose out of the
subject matter of the insurance. The most obvious example of such subrogation right is perhaps a
wrecked motor vehicle, but other instances include fire damaged materials such as paper which
probably has a salvage value as pulp.
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e.
Contribution
Contribution is the doctrine which enables insurer to call upon other insurers similarly liable to the
same insured, to share the cost of an indemnity payment. It arises where there is ―overlap‖ insurance,
so that an insured is covered once more, in respect of the same loss.
Contribution only applies where the following conditions are fulfilled:
Two or more policies of indemnity exist.

Each must cover the same peril, giving rise to the loss.

Each must protect the interest of the same insured

Each must relate to named subject matter.

Each must have been in force at the relative time

Proximate Cause:
Proximate cause means the active, efficient cause that sets in motion, a train of events which
brings about a result, without the intervention of any force.
1
THE CONCEPTS OF RISK
Risks are commonly linked to uncertainty according to Ejoifor (1989: 370). In Amaonwu
(1989:3), risk could be defined as loss uncertainty. Possible unpredictability Amaonwu went further, to
highlight the advantages of this definition, which he clearly stated to include avoidance of introduction
of too many undefined and possible ambiguous words such as doubt, objective, unpredictability
possibility, and hazard‘.
According to Ferrer and Mallari (2011), there are different kinds of risks, some of which may be
insured according to the nature and possible consequence of the hazard involved. Risk can basically be
classified into two viz: Pure and Speculative or Fundamental and Particular.
A pure risk offers no prospect of gain, only loss if the risk becomes a reality of preservation of the
status quo if it does not. Example of pure risk are fine, flood, accident, death, etc. these are risks which
might normally be the subject of insurance.
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Speculative risks are those which offer the possibility of gain or loss. Generally, speculative risks
may not be insured. Provision against the possibility of loss with this type of risk is usually made by
commercial transactions, such as the purchase of ―futures‖ by business management, such as
diversification.
Fundamental risks these are threats which, rather than individuals, tend to affect large sections of
society or the world at large. Therefore, a fundamental risk, the element of catastrophe, has within it.
Examples of this include war, hunger, earthquake, pollution, etc. Where fundamental risks have a
tremendous widespread disaster potential they are generally regarded as being commercially
uninsurable. Instead they are considered to be problems of society as a whole, to be dealt with at
government of international level.
Particular risks these are risks whose consequences are relatively limited: most insurable risks are
specific risks that could lead to losses for individuals if they become realities.
2
INSURER’S RISKS
An insurance company faces four major type of risks:- These includes sales decline, excessive
benefit cost, portfolio value loss, and cancellation and polity loss risks.
a)
Excessive benefit costs are the first type of risks: they can occur because of natural disaster,
because inflation drives average claim amounts to higher than anticipated levels or simply because the
company‘s original estimates of loss were wrong.
b)
Sales declines represent the second type of risk: They can occur because a severe economic
downturn eliminates either the ability to pay for premiums or the need for certain types of insurance.
Business insurance is the most obvious example, as the need for it decreases during a recession, when
business activity. Demand for life insurance, particularly whole life, may also decline in inflationary
period as people look for investment that will provide some protection from inflation.
c)
Portfolio value loss is a risk that results from a similar set of factors: as inflation rates rise, the
general levels of interest rates rise as well. A rise in the general level of interest rates results in a
decline in the market value of existing fixed income securities.
An economic default on bonds and mortgages and through a reduction in common stock value
causes profits to decline. Defaults rate on the type of securities that insurance companies hold, have
remained low even in economic downturns, but losses in market value have been substantial.
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d Cancellation and policy loan risks are primarily problems faced by companies offering whole life
or endowment policies. These withdrawals generally occur during both period of high interest rates and
severe economic down-turns, of course, high interest rate periods and economic down-turns, are both
periods when the value of securities may be low. For fixed securities, the maturity value is not affected
by a decline in current market value.
The decline in market price can be significant because: a) It reflects an opportunity loss, in that
higher yielding securities are currently available, and b) If the company should need cash, the bonds
would have to be sold at a loss. A loss in the value of equity can have an immediate negative impact on
equity and surplus rations even in the absence of a need to sell the securities at depressed prices.
The conditions which led to each of the various types of losses are summarized as follows:
Problem
Excessive claim losses
Sale decline
Losses in investment portfolio
Policy loans and cancellation
3
Causes
Natural disasters, inflation
Inflation, economic down-turn
Inflation, economic down-turn
Inflation, economic down-turn
INSURANCE AND RISK MANAGEMENT
Risk management has been defined as the protection of assets, earning, liabilities and people of an
enterprise, with maximum efficiency and at minimum cost, (Verbano & Venturini, 2013; Bello, 1989,
p.2). However, according to Kpodo (1989: 3), “Risk management requires that the threats to
expectation are identified, analyzed or evaluated, and a policy developed by physical and financial
means, so that the expectation will be fulfilled in the most efficient manner, by reducing or removing
these threats.
A new profession has developed: that of the risk manager. He is employed by enterprises to
minimize the cost to them, of the pure risks which they are subject. The members of the profession
have formed the Association of Insurance and Risk Managers in Industry and Commerce (AIRMIIC).
In line with the risk management definition given above: Dionne (2013), stipulates that the task of
the risk manager is first to identify the pure risks to which the enterprise is subject, and then to analyze
the situations. Aven, T. (2018)‘s also supported. The studies next classify the risks, having regard to
the maximum loss potential of each and the predictability of loss. Once this has been done, he can
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select the tools best fitted to deal with each risk. The risk classification and the section of tools best
fitted to deal with each risk, can be discussed under ―Risk Treatment‖.
RISK IDENTIFICATION
This is the scientific approach to examining each and every risk's source of harm, type of failure,
immediate and underlying causes and consequences. The sources of risks are identified by establishing
the full details of the activities of the organization and their dependence on each other and on other
outside activities. An organizational chart can show the relationship between personnel, internal
function and the progress of a commodity from the supplier through the manufacturing process to the
ultimate consumer. Also, an analysis of balance sheets accounts can help establish the value of assets
and earnings exposed to risk. By relating this financial information to the process chart, one can
identify concentration of risks to assets or earnings.
RISK ANALYSIS AND QUANTIFICATION:
This book put some emphasis on our belief in assessing risk, as to the probability that some
occurrence will or will not occur.
Quantification of Risk on Motor:There are many considerations that need to be taken into
account when determining the risk involved in motor car activity. Some of them are the vehicle's build,
the engine power, the use of the vehicle, the type of vehicle's body; the vehicle's driver's figures, his
age, his physical condition, past experience claimed, and his position in society. Also, the use to which
the vehicle is to be placed is for transportation of passengers or for private use or carriage of goods; the
place in which the vehicle will be used and also the vehicle value All of these considerations can help
measure the risk associated with motor vehicle use.
Risk Quantification in Fire Insurance: Fire is a major risk, which industry and private
individuals must come to terms. Risks quantification in fire insurance is different from that in motor
insurance. In determining this risk, the following factors are taken into consideration: Physical hazards;
the material used for construction of the buildings, whether it is wood, cement, glass, asbestos, zinc or
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aluminum. All these factors will increase or decrease the level of risk. The height of the building, the
location of the building and the occupants of the building will also assist in quantifying the risk in a
building. A building with multiples of tenancy does not present the same risk with a building with one
or two tenants. A building very close to a rain line in a grassy land, is more prone to be involved in fire
than one far removed.
Having looked at all these factors, the bearer of the risk will arrive at the premium he will charge
to bear risk.
QUANTIFICATION OF EXTRANEOUS PERILS-RISKS
These risks may be risks of fundamental nature and cannot easily be quantified. For example, it is
not possible to quantify damage that will be done by earthquake, flood or other natural disasters. Risk
bearers rely on either statistics of past damage by risk in arriving at extra premium to be charged for
such extraneous risk.
There are also requests made for inclusion of strikes, riots and civil commotion. Damage resulting
from these risks should naturally be covered by the government too. Often times, requests are made for
risk bearers to undertake such risks. Where such risks are undertaken, the risk bearer does not have
basis for quantification of the risk, but uses past experience to arrive at the premium to be charged for
such risk.
QUANTIFICATION OF RISK ON HUMAN LIFE
The human life cannot be quantified in terms of money. But for a risk bearer to cover the risk on
human life like dying or being involved in an accident, he has to take various factors into
consideration. These factors include the physical condition of the person, his financial standing in the
society in relation to the amount which he wishes to place on his life, and his resources to maintain
such policy.
Most of the conditions to determine the quantification of risk on human life, depend on the typical
condition of such a life. A risk bearer would resort to obtain information on the state of the person he is
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proposing for life insurance or other forms of insurance involving human body. He is also in position
to carry out tests or other examinations to determine the state of health of such a person. Typically, a
medical doctor performs these roles and interprets the proposer's state of health, and depending on the
circumstances that such a person may be eligible for insurance, and if so, the sum to be paid for such a
risk. Also bearing in mind the time he needs the cover for. The decision as to what form of funding
plan to follow will ultimately rely on the assessment of the probability and magnitude of a possible
loss-producing event by the management.
CONCLUSIONS
In the overall management of risk, the risk manager‘s task includes arrangement of the affairs of
his firm, so that the cost of pure risk is minimized and that no loss will occur that would financially
embarrass the firm. He can choose which tool or combination of tools to employ.
Firms that chose not to insure, must face the consequences of their decision. A firm that does not
insure its liability for damage to customers goods in transit, will have to pay the cost of investigating
and checking customers claims, as well as the cost of settling them. In the case of a risk that could
result in a very large claim, the firm that decides on self-insurance may have to put aside money, in a
self-insurance fund, to enable it meet a sudden large call on its resources.
Since inflation and economic down-turn are most probable sources of risk for insurance
companies, the investment portfolio does not provide significant opportunity to diversify away risk
from other aspects of the business. Because of this limited opportunity for diversification, insurance
companies purse a conservative portfolio strategy. Long term fixed income securities are the primary
investment for both life insurance and non-life insurance companies. Life insurance companies hold
large quantities of corporate bonds and mortgages, while non-life insurance companies hold larger
quantities of government securities. (see table 1).
In addition to higher return, commercial mortgages create the opportunity for ―equity
participation‖ through which the insurance company can participate in profits if the venture is
successful.
Within the investment portfolio, the normal principle of eliminating diversifiable risk is followed.
Unfortunately, legislation designed to assure safety, increases the difficulty of achieving proper
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diversification. Regulations are based on the view that high grade, heavy investment in these areas and
restricting them from such areas as direct investment in real estate, has left them exposed to the full
effect of interest rate risk associated with inflation.
In an attempt to diversify within these regulatory limits, insurance portfolio managers have to
move towards commercial mortgages with equity participation. This has given rise to some of the
diversification benefits of real estate ownership, without violating restriction on direct real estate
ownership.
To deal with interest rate risk, it must be remembered that the life insurance companies base their
premiums on expected investment. The factors that are to be used in determining or quantifying the
risk in human life include the mortality Tables in a given situation. These factors are always
determined by a quantifying Actuary.
Another aspect of quantifying risk on human life is the moral hazard. If a proposal is to be made
on the life of any person for abnormal high amount, the risk bearer should be cautious and should do
everything to rule out cases of suspected suicide of intention to benefit from insurance. The new
Insurance (Special Provision) Decree 1988 has changed the scope of insurable interest, and this is the
more reason why insurance companies should be more thorough in granting life policy on the life of
other people, where the proposer is not to be insured himself.
Quantification of Risk on Property
Apart from the motor and fire insurance, the risk quantification which have already been
discussed, the other property where risk bearers have to quantify the risks which they bear, are in cases
of aircraft for aviation insurance, ship and cargo in the case of marine insurance and other forms of
insurance granted under miscellaneous accident. The risk bearer, as in the case of fire insurance would
consider the physical nature of the risk. In the event of an aircraft, various flying facilities at airports or
places the aircraft will ply, as well as the type of cargo carried by such aircraft. The same consideration
is also given to the quantification of risk in the event of ship, and cargo the tonnage of the ship, the
value for which the ship would be insured, the construction of such ship, the ports where the ship are
likely to call: barging and off-loading facilities available in such parts in the case of third party damage
to property and equipment.
In the case of cargo, the type of cargo, the value of such cargo, the method of package of such
cargo, whether they are containerized or loose, the inherent vice of such cargo, the effect of sea water
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on such cargo, and the destination of the cargo. All these factors assist the risk bearer in quantifying the
risk.
RISK TREATMENT:
The next step after risk identification and quantification is the risk treatment. Risk treatment
involves (a) the control, (b) the financing, (c) the administration of risk.
Risk control seeks to change the conditions that bring about loss producing events or increase
their severity, for example, ―ensuring good house-keeping in factories by putting in place, an effective
waste disposal procedure.‖
Even after control measures have been implemented, provisions have to be made for the funding
of losses (risk financing) that may occur as a result of inevitable residual risk. Risk financing may be
achieved in one of the following ways:
a)
Charging losses as they occur against current operating cost.
b)
Prior provision for losses arranged either through the purchase of insurance or through the
creation of a contingency fund. Insurance is one of the most important methods of risk funding. If
management knows the policy would not be canceled or borrowed against, investment maturity can be
based on expected eventual payment date, thereby insuring a rate of return. Unfortunately, the picture
is complicated by a number of uncertainties, including the fact that bonds can be called, and policies
can be canceled or borrowed against.
The risk of excessive withdrawals through loans and cancellations is primarily dealt with, through
a balancing of the maturity structure so that any demand can be met through maturing securities rather
than selling securities at a discount. This has been combined with some movement towards raising the
policy loan interest rate in new contracts or making it a floating rate tied to some money market
indicators.
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CHAPTER EIGHT
PRINCIPLES OF MANAGEMENT
INTRODUCTION
Since the 1950s, the management sector has gained such attention as shown by the daunting
volumes of literature that any additional work in the area might smell of theoretical flourishing.
However, if we consider the fact that business and management are companion phenomena, the
importance of this chapter to a book of this nature need not be overemphasized. And to a field that has
experienced some measure of identity problems a continuous search and theorizing on its conceptual
framework is a welcome and fundamental pursuit.
Management is as old as the day man started using groups in performing tasks and pervades
everyday man started using groups in performing tasks and pervades every field of human
organization. However, its practice falls into two levels – the instinctual perspective and the
―organized‖ or ―deliberate‖ management. The Instinct theory posits that every person has been
endowed with some instinct to ―manage‖ his or her property. One need not bother himself with the
implications of this statement but suffice it to say that instinctual management is remarkably different
from the modern Management we practice in organizations.
According to Worth (2018: 119) and Drucker, (1977:12), ―management of business enterprises or
a public service agency is essentially a different form of property management or medical practice or
sole legal practice‖. The chapter focuses on modern management, or what I had earlier called "ordered"
management. Nevertheless, it would not be out of place to observe that this concept of management as
an instinct was created by the rapidly fading "matter of identity" problems that are still haunting the
management profession in our country Nigeria.
The gradual realization of the value of management for decades has exploded into an
unprecedented point immediately after the Second World War. And since then it has dawned on all and
sundry that management is every organization's engine of growth. All profit-oriented and non-profitoriented organisations have come to appreciate the fact that management is important in any endeavor
that needs people to cooperate in making things happen. The tacit recognition by non-profit making
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and allied organisations, as exemplified by such established names as agri-business (the application of
business process and principles to farming), has been reflected in the ever-widening connection
between these fields and companies.
Vance (1974:116) has extended the horizon to medi-business, educa-business and politicabusiness the application of sound management to the running of political campaigns, Scherer, &
Palazzo (2011) also found consistent. The explosive realization could not have been possible without
the parallel development in both size and complexity of organizations. It is the emergence of the
society of organizations, more than anything else that has brought management to the forefront.
Management does not only refer to that emergent field or study or discipline but also means task an
organizational task. It is also people. And it has been used in this discussion to reflect these three
perspectives.
Definition of Management
A precise definition of the word management has included both practitioners and theorists of the
profession. This imprecision or non-agreement on the right of management is not so much on its
inexactness as a science as it is on it pervasiveness in the fields of human endeavor. There has been
that tendency for every person to emphasize that aspect of management with which he deals. However,
one common feature among these varied opinions is that management does not take place in a vacuum
neither does it apply appropriately to a truly one man business. People only practice management in an
organizational setting. Before looking at different definitions, one must hasten to add that the plethora
of definitions may be grouped into functional emphasizing the functions of management; behavioral,
focusing on the primacy of human being (resources) in every management process. The definition
could also reflect the basic philosophy of the Quantitative School by stressing the decision aspects of
management towards achieving organizational goals. It becomes systems‘ oriented if the distinguishing
feature is on the relationship of inputs. Finally, those definitions that reflect the dynamic nature of the
business environment epitomize the contingency approach. In effect, the definitions may be classified
on the basis of the school of management thought. Some of the most common definitions of
Management are:
(i)
Management is the planning, organizing, directing, and controlling of the enterprises‘ operations
so that organizations‘ objectives can be achieved economically and effectively. Flippo (1966:4),
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(ii) Management is the process of getting things done by and through other people. Hicks and Gullett
(1981:70),
(iii) Reflecting the systems perspective is the definition by Lundreg (1974:5) in which he sees
management as – a force that, through decision making based on knowledge and understanding
interrelate and integrate, via appropriate linking processes, the elements of the organizational
objectives.
The definition emphasizes four major organizational linking processes; the organization‘s
communication network, the formal structure, authority relationship, and social system.
iv)
Management is the ―effective utilization of human and material resources to achieve the
enterprises objectives‖.
v)
Glueck (1977:11) has, however, attempted to integrate these different schools into an all-
embracing definition. According to him, management is… the method of allocating the inputs (human
and economic resources) of an organization by planning, coordinating, directing and managing for the
purposes of generating the outputs (goods and services) needed by its customers in order to achieve
the objectives of the organization. Research is carried out in the field by and through the staff of the
company in an ever-changing business climate.
Evidently, the primary focus of every management (used as people) is the objectives of an
enterprise which must be achieved through effective combination of the resources of the enterprise.
Management: Science versus Art
The tendency to polarize all human fields of learning into science and art has been manifested in
the field of management. Theorists and practitioners have ―pitched tents‖ in their earnest desire to
answer the question – is management a science or an art? Opinions on this issue differ. There are those
who are strongly convinced that Management is a science while on the other side are the art advocates
who have been unequivocal in their contention that Management with its highly coated human factor
cannot be a science but an art. These are two polarities. Some are rest adherents that they never
imagined a zone of intermesh or compromise between science and art. And this stemmed from the
different definition some gave to science and art. Management and Nuclear physics are not the same
from the point of view of science. Any attempt to define management as a science from this
perspective would tantamount to extending the frontiers of the debate instead of finding answer to it.
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Essentially, the function of science may be seen as involving the establishment of general laws,
predicated on empiricism, concerning the behavior of events or objects in such a way as to facilitate the
establishment of relationships between these events or objects and based on that be able to predict
reliable, future events. In effect the science of management refers to that body of knowledge
comprising the theory, concepts and principles of management upon which performance is based. To
this extent management is a science but quite unlike the physical sciences.
The application of this knowledge to reality is the art in management. Bernard (1938:291) defined
it as behavioral knowledge. Its components are virtually personal skills, experience and practice. The
management at art protagonists observed Brech (1975:21) saw these – as opposed to knowledge – as
the determinants of competence; it had in it a very large element of personal skill, such that learning of
techniques would not lead automatically to competence. So much of this skill was centered on human
judgment and human considerations of cooperation and morale that any mechanistic approach could
not achieve success. To some extent, there is some truth in what they are saying but instead of forming
the point of delineation between science and art, it should be the zone of complementarities.
Koontz et al (1980:8-9), those who diagnose ―by the book‖ or design wholly by formula or
attempt to manage by memorization of principles are almost certain to overlook realities,…executives
who attempt to manage without theory and without knowledge structured by it, must trust to luck,
intuition, or what they did in the past. And of course, none of these extremes gives the true view of the
practice of management. Managers need the underlying knowledge in order to perform effectively.
Against this backdrop, management is both an art and a science.
UNIVERSALITY OF MANAGEMENT FUNCTIONS AND TRANSFERABILITY OF
MANAGEMENT SKILLS
The issue of universality of management functions just like the science – art controversy has
generated considerable amount of debate among Management scholars. Succinctly put, the universality
issue focuses attention on whether Managerial functions are essentially the same in all organizations
and cultures. In effect, it seeks to discover, whether the experience acquired in managing one
organization can be effectively utilized in running an entirely different organization of the same type of
organization, but in another cultural setting.
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There has been that tendency among Management theorists to restrict this universality concept to
the managerial functions. This narrow aspect of management does not give room for a systematic
analysis. Attention should rather be focused on the basic management theory concepts, and principles –
what Koontz el al (1980: p.115) classified as fundamentals of management. Before a detailed
discussion of this concept, there is the need to look at the other side of the coin – transferability of
managerial skills and experience. Our analysis would not – as some authors are wont to do – be intra
country focused. That is, analyzing two different organizations in the same country typical of the case
of the retired Army General being successful in business or farming. Instead, the transferability of
skills and experiences should be looked at from two different cultures – this of course falls within the
realms of comparative management.
On the universality of the fundamentals of Management, research has shown that the underlying
theories, concepts, and principles are the same across countries. The science of Management has a
universal appeal but is culture bound in terms of application. The same basic principles applied in
structuring or planning in the USA are meaningful to the Nigerian manager engaged in role structuring
and planning. According to Richard Farmer (1974:302), management is universal only the outcomes
are strikingly different.
In addition, this view has been corroborated by Koonzt el al (1980:129) in their observation that –
…the universal nature of Management is also apparent in the specialized books on administration
for business, government and other types of enterprises. While semantic differences may exist, one
finds that, at the fundamental level, authors are talking about the same phenomena.
Granted that Management fundamentals are universal does this universality guarantee
effectiveness in the transfer of managerial skills and experiences. As earlier pointed out, transferability
has to do with the application of managerial knowledge acquired in a particular cultural
setting/sector/culture. This has to do with practice – the art of management and to this extent observed
Drucker (1977:25) it is not a value-free science. These cultural inhibitions to the effective
transferability of Management skills and experiences become more pronounced when the
transferability is between the developed and developing countries. In the views of Onyemelukwe
(1973:1) there has been the assumption that all management principles and concepts are universal in
their application.
However, the process of industrialization in its social, cultural and political context in Africa has
many distinctive features – features that hinder the transferability of managerial skills. In effect, culture
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serves as a constraint to the effective transferability of managerial skills. The skills and experience
acquired in running an enterprise in Japan would be a great asset to the manager on transfer to Nigeria
provided he recognizes the cultural differences. This demands a thorough and systematic reconciliation
between the experiences acquired and the new cultural variable.
Nevertheless, managerial skills are easily transferable between organizations in a given industry
especially when it involves pure managerial jobs. This is why it is possible for top management people
to move from one organization to another even within the public sector as manifested by the frequent
cabinet reshuffle and the constitution and reconstitution of boards of parastatal.
HISTORICAL EVOLUTION OF MODERN MANAGEMENT
Attempts at tracing the origin of development of management have always begun with this
common statement: Management is as old as man. If management has been a scientific invention, we
would have been talking of a particular day one smart fellow came out of hibernation to announce the
arrival of another scientific wonder. But it were never so. The practice of Management has always been
with every organization setup. People have always practiced management, the only difference being
the levels of awareness that goes with such practice. As a result of this, it is more appropriate to talk of
the historical evolution of management rather than its origin.
Overtime, the practice of management has crystallized into the systematic body of knowledge
with identifiable disciples and practitioners who have legitimized roles to play in the society. And this
marks the point of departure between the different evolutionary phases – which fall into two: the
primordial or prehistoric era and the modern management era. The prehistoric era spanned the period
before the 20th century and has been appropriately qualified as prehistoric period on the basis of the
level of awareness. It was more or less an era of ignorance: even though they practiced and contributed
to management, they never realized according to Shay (1967:130) that they were dealing with a distinct
and identifiable body of knowledge, practice and function0 in society.
The second phase – modern management era, spans the period of the 20th century. It was heralded
by the publication of F.W. Taylors, ―Principles and Methods of Scientific Management‖, and his
famous testimony before the congressional committee in 1912. Some writers trace the period of
modern management to the industrial revolution and the factory system, contending that
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industrialization has been the determining factor in the evolutionary trend of Management. There is no
doubt that industrialization has had a remarkable influence on management and that there were some
industrially centered write-ups during the factory system. But following our criterion of crystallization
of knowledge the era of modern management should be conservatively left at the ―threshold of the 20th
century.‖ The modern management era will be discussed in more details later.
Figure 8.1: The Contributors and the area management emphasized during the pre-historic era are as shown
Apprx. Date
5000 – 1600 B.C.
1491 B.C.
500 – 325 B.C.
300 B.C. – 284 A.D.
500 – 1400 A.D.
1700 - 1785
1469 -1527
1860 - 1828
Management Thought & Concept
Planning and control: Materials scheduling
systems, organizational hierarchy.
Planning, organizing, controlling Participative
management, span of control and delegation of
authority.
Systems approach: specialization: Scientific
method used, motion study materials handling
technique: use of staff principle.
Scalar principle of organization: job description
performance standards written plans: unity of
command.
Decentralized Operations, centralized authority,
scalar control, traits theory of leadership.
Application of the principles of specialization
and accountability of performance: location and
planning etc.
The basic principles of leadership – mass
consent, cohesiveness location and planning etc.
Personnel management – working condition,
social responsibility.
Contributor/accomplishment
Egyptians – used in the building of the
great pyramid.
Moses – the exodus of the Jews from
Egypt.
Mencius: Cyrus: Plato: Socrates:
Alexander the Great – development of
trading and military organizations.
Roman Empire and Diocetian in his
reorganization exercise towards making
the empire more manageable.
Growth of feudalism
Industrial Revolution (England)
Niccolo Machiavelli
Robert Owen
Adapted from: Hodgettes and Altman, History of Management Thought, in Paul Mali (ed.) Management
Handbook, New York: John Wiley & Sons, 1981.
In addition to the above the following organizations have made remarkable contributions to the
field of management.
a)
The Roman Catholic Church: This organization reputed to be the most organized in the history
of Western civilization has sustained its stability and viability, in spite of the size through its effective
administration techniques. It has been in the forefront in the use of such management concepts as
hierarchy of authority, the principle of independence, functional specialization etc. These concepts
have been in use by this organization even before management writers and practitioners recognized
them.
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b)
The Military Organization: The military organization is another old-age organization that owes
its survival to its system of administration. This system is not different from what we know today. The
only striking thing about the system just like the Roman Catholic Church – is that the military has been
using these management concepts and principles long before such concepts became codified
knowledge. Some of these concepts include the staff principle, hierarchical organization and authority
and some leadership principles.
MODERN MANAGEMENT ERA:
The discussion of the genesis of management within this era will be patterned along what some
authors call schools of management thought. These shades of management thought are: Scientific
Management, Functional (Process), Human Relations Movement, Behavioral Science Movement,
Quantitative Approach System and Contingency Approaches. The Schools have been chronologically
presented and they reflect the evolutionary trend of management. Each differed from its predecessor in
some respect but they seek to perpetuate the practice of management.
I.
Scientific Management
The focus of scientific management as enunciated by its founder, Fredrick W. Taylor, was one of
the best ways of doing a task which could be realized through careful observation, experimentation and
measurement. Taylor‘s contention was that increased productivity was the answer to higher wages and
profits and that this increased productivity could be achieved through increased efficiency which on its
part could come about through the adoption of scientific methods as opposed to rule of thumb.
Taylor (1970:82-83)identified four underlying principles of scientific management as follows:
(i)
Develop a science to replace the rule of the thumb knowledge of the workmen.
(ii) Scientifically select, and then progressively develop the workman.
(iii) Cooperate with the workman to ensure that the work is done according to the laws of the science
developed.
(iv) Divide the work between management and the worker so that each would perform the duties for
which he was best fitted with resultant increase in efficiency.
Taylor was convinced from a series of experiments he performed that, if strictly followed, the
above principles would ensure productivity in output. In sum up, the Scientific Leadership of Taylor is
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at the forefront of specialization, analysis of time and activity and opportunities. Some other
contributors to the scientific management movement were: HENRY GANTT who is widely
remembered for his graphic aids to management planning, coordination and control of production. His
charts emphasize the relevance of time and cost in planning.
According to Scalan (1979:25) the essential element of Gantt‘s was scheduling around time
instead of around quantities which up to then had been the practice. The GILBRETHS: (Frank and
Lillian Glibreth) extended the frontiers of the one best way of doing things. He perfected time and
motion study in the area of bricklaying. His exploits in this area led to his developing the seventeen
elements of job motion commonly known as Therbligs (a backward spelling of the word Gilbreth with
―the‖ transposed). Lillian Gilbreth assisted her husband immensely in the study but her concern was
more on the human aspect of work. It must be point out that scientific management was essentially
mechanistic and its focal point was the worker.
II.
Functional of Process Management
Scientific Management and Process Management were essentially contemporaneous differing
only in the focus of attention. Whereas scientific management concentrated on the worker, Henri Fayol
(the chief protagonist of the process approach) was concerned with the administration of the total
organization. In effect the functional approach centers on the principles of general management.
Henri Fayol and his followers saw effective management as entailing knowledge of the
management functions and familiarity with administrative management principles. They attempted to
explain Management from the point of view of the manager‘s work. Out of a cursory retrospection,
Henri Fayol x-rayed his experiences from three organizational perspectives. First he classified the
activities on an industrial setting into six groups, viz technical (production): commercial – buying,
selling and exchange: financial: security accounting and managerial. From the second perspective
which centered on the work of the manager, Fayol (1965: 5-6) identified five elements of
management.
These are:
(i)
Planning: to foresee and provide means of examining the future in drawing up the plans of
action.
(ii) Organizing: building up the dual structure, material and human, of the undertaking.
(iii) Commanding: maintaining activities among the personnel.
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(iv) Coordinating: binding together, unifying, and harmonizing all activities and efforts.
(v)
Controlling: seeing that everything occurs in conformity with the established rules and expressed
commands.
These were the very first set of management functions to be identified by anybody and they
formed the springboard upon which latter day process school disciples improved. And finally he listed
fourteen basic principles that serve as guided to the manager when performing his duties. These
principles are:
i)
Division of labour
ii)
Authority and Responsibility
iii)
Discipline
iv)
Unity of command
v)
Unity of direction
vi)
Subordination of individual interests to the general interest
vii) Remuneration
viii) Centralization
ix)
Scalar chain
x)
Order
xi)
Equity
xii) Stability of tenure of personnel
xiii) Initiative
xiv) Esprit de corps.
In the light of the above, it is obvious that Fayol and the whole lot of the functional approach
advocates saw management theory as a way of organizing practical management experience.
III.Behavioral School
The Behavioral School is a two-pronged approach. Hodgetts and Altman (1981:12) explained it
this way. Firstly, the interpersonal behavior branch which centers on the individual and his or her
motivation as a socio-psychological being. Secondly, the group behavior which is concerned with the
enterprise as a social organism consisting of the attitudes, habits, pressures and conflicts of the cultural
environment of the people who make up the organization.
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The second aspect of the behavioral school has been labeled by some authors as the Human
Relations School. The behavioral school in its entirety emerged as a response to the myriad of
problems that arose out of the application of scientific management principles. Such problems included
the falling productivity despite the increased wages and bonuses and the lack of human factor. As a
result of this
Figure 8.2:
Modern Management Era.
School of Management Thought
Scientific Management
Administrative Management
Behavioral School
Management Science School
Systems Theory
Contingency View
Contributors
F.W. Taylor
Henry Gantt (1961 – 1919)
Frank Gilbreth (1869 – 1924)
Lillian Gilbreth (1878 – 1972)
Harrington Emerson
Henri Fayol (1841 – 1925)
Lyndall Urwick
Elton Mayo
Abraham Maslow
Douglas McGregor
Chester Barnard
Roethlisbergor (1939)
Churchman (1957)
March and Simon (1958)
Forrester (1961)
Raiffa (1968)
Kenneth Boudling (1956)
Kast and Rosenweigh (1963)
Bertlanffy (1972)
Burns and Stalker (1961)
Woodward (1965)
Thompson (1967)
Lawrence Lorsh (1967)
Contributions
Scientific Management;
Control of System (charts)
Time and Motion Studies, and
Efficiency principles
Management functions and
principles
Hawthorne studies, Informal
organizations, Motivation
theories, and participation.
Operations research,
Simulation, Game theory,
Mathematical model, and
Decision theory.
Systems concepts – open
system, synergy, equifinality
etc.
Dynamic environment,
organic – mechanistic,
Technology, Matrix designs,
organizational changes etc.
Adapted from Andrew D. Szilagyi, Jr. Management and Performance, Glenview, Illinois: Scott, foresman and company, 1981
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MANAGEMENT FUNCTIONS
The process of functional approach views Management as a process encapsulating many
functions. The work of the manager, following this functional approach, essentially involves
performing such functions as planning, organizing, coordinating, leading, controlling etc. It is pertinent
to point out that Management scholars are not unanimous as regards the precise functions a manager
performs. Apart from the variation in the numbers of functions, there is also the semantic problem. As
depicted by figure 11 every writer has his own set of functions.
Fig 11: Tabular representation of theorists and their set of functions
Contributor
Koontz, et all
Henri Fayol
Planning
x
x
Organizing
x
x
Controlling
x
x
Lyndall Urwick
Davis
Mcfarland
Thieraut et al
Hicks & Gullett
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
Others
Directing, staffing, commanding,
coordination
Forecasting, coordination,
command
Directing
Motivating
However, the writers converged in the areas of planning, organized and controlling – functions
usually classified as fundamental. But they disagreed on such functions as staffing (Koontz et al, and
Dale); directing (Koontz et al, and Terry) coordination (Fayol, Terry and Urwick); commanding
(Fayol, Urwick); and leading (Szilagyi). This disagreement nevertheless is merely in principle.
Essentially such functions as directing, leading and motivating cover the same set of activities – getting
employees to perform in ways that, will enhance the realization or organizational goals.
Koontz et al (1977:81) observed the teamwork feature as the nature of management, for the aim of
management is to achieve unity of individual efforts towards the achievement of group goals.
Coordination practically pervades all the management roles and therefore does not count as a normal
separate role. Indeed, Griffin (1984:9) sees coordination as an intrinsic part of the organizing function:
one coordinates in the organization.
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CHAPTER NINE
BUSINESS ORGANISATIONS’ SOCIAL RESPONSIBILITY
INTRODUCTION
The area of business social responsibilities has always been controversial in the field of
management. This has resulted in series of arguments as to whether or not business organisation
should engage in socially ‗responsive‘ behaviour. Some management scholars and business people
argue that business organisations should be socially responsible, in addition to carrying out their
legitimate activities while others have contrary view. This opposing group maintains that as far as
organisations discharge their legitimate tasks legally, orderly and efficiently, they are socially
responsible.
Against this background, this chapter will discuss the following sub-headings and they will
constitute the main objectives of the chapter.
1.
The changing role of business
2.
Definitions and concepts of social responsibility for business
3.
Argument for and against social responsibility
4.
Reasons why most business organisations neglect social responsibility
The changing role of business
In the early 1990s, the mission of business was primarily economic. But within the past few
decades there have been pronounced change in the views of many business managers about their
social responsibilities which have paralleled and party reflected the managing priorities and
expectations of society about business social function (Steniner 1975; 153). This is because business
relies on society for existence. For example, business depends on society for its major resources
financial, material, physical and human.
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Again the society relies on business for high quality goods and services and at affordable prices.
n view of this, the inter-relationship between organizations and their environment has become
increasingly important. The society, managers and organizations are quite aware and conscious of this
interdependence.
As a result, organizations are no longer seen as completely private activities, particularly in the
business sector, which are free to pursue their own ends as long as they violate no laws. Rather, their
acts are viewed as having public repercussions that go beyond serving customers and charging owners
' returns (Scherer & Palazzo, 2011; Hicks and Grullet, 1981:75).
The impact of this notion is an increasing public clamor for social responsibility (or corporate
social sensitivity as well as other social organizations (Ismail, 2009; Davis and Blomatrom 1975:38).
But the business people have the task of knowing what to do to meet the demand of various claimants
for social responsibility. For example, what do they expect? How do they define social responsibility?
And what particular responsibilities should be given priority?
All these claims have made the issue of social responsibility concern to business. This is as a
result of the fact that business cannot solve all society‘s problems, with its limited resources. Yet they
are expected to get actively involved in getting them solved. The issues of definitions and concepts of
social responsibility will be tacked in the next section.
Definitions and Concepts of Social Responsibility
There are many definitions of social responsibility as there are authors writing in this field. An
author's definition depends on how he or she perceives the concept and its corporate role in, the
society. From the preceding section, one can rightly conclude that social responsibility is essentially
concerned with public interest. However, each of the following definitions covers a reasonable
dimension of social responsibility (Rahman, 2011; Onuoha, 1 990:19).
Social responsibility is seen as the intelligent and objective concern for the welfare of society
which refrains individual and corporate behaviour from ultimately destructive activities, 'no matter
how immediately profitable, and which leads in the direction of positive contributions to human
betterment (Mullerat, 2010:273 Cock and Mendleson, 1 977:30).
It has also been defined as the obligation of decision makers (or organizations) to take actions
which protect and improve the welfare of society as a whole along with their own interests (Wulfson,
2001; Sison, 2009; Davis and Blomstorm, 6). The concept of social responsibility can be taken to
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involve all the activities of organizations in which their limited resources are expended, appear less
economically attractive and viable, but are socially desirable by members of the society. Few examples
include awarding scholarships, financial support for charities, tarring of rural roads, sinking bore-holes,
and so on.
In the broadest sense, the net effect of social responsibility is to improve the quality of life. It
should be emphasized that the quality of life is determined by society. It also harmonises business
actions aimed at achieving the traditional economic gains of business, such as profit and growth, with
society's wants, for example, social benefits. Davis and Blomstrom are of the opinion that the idea of
social responsibility recognizes that each person is attached to an extended system on which he or she
is partly dependent. Consequently, certain obligations or social responsibilities arise from this
attachment, and the same reasoning obviously applies to groups and institutions.
An important area of social responsibility is to consider the needs and desires of other people that
may be affected by their actions. For example, a businessman whose factory pollutes the environment
constitutes a public problem. As members of social system he should be held responsible for the effect
of his act anywhere in that system. In so doing, business people look beyond their personal interests
and also beyond the firm's narrow economic and technical interest.
Another notion of social responsibility is the question of public consent. Business organisation
cannot, function without public consent. They must act in the public interest to obtain that consent, as
the public interprets it at any given time. On the day that management forgets that an institution cannot
continue to exist if the general public feels that it is not useful or that it is anti-social in the public
concept of what is anti-social, the institution will begin to die (Nixon, Pawson & Sosenko, 2010;
Golden 1968; 4).
Finally, Steiner (p.159) considers these concepts of social responsibility as broad and general.
That they do not explain very precisely what social responsibilities are for all businesses nor what
those of a single business are at a particular point in time. Unfortunately, there is formular for either
case, and both are subject of substantial disagreement and the cause of frustrating dilemmas for
business managers.
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Arguments for and Against Social Responsibilities for Business
The question of whether or not business organizations should be socially responsible has
generated a lot of arguments. These arguments have produced two schools of thought. One school of
thought supports the argument that business should have social responsibilities, while the other party
opposes it. The supporters of this group, Keith Davis, as its chief priest maintains that in addition to
business carrying out its normal and legitimate operations of providing goods and services effectively
and efficiently, it must engage in some other activities which make it socially responsible, He argues
that corporations are creatures of society and should respond to societal demands; the long-run selfinterest of business are best served when business assumes social responsibilities, and it is the moral
and right thing to do.
The opposing school is represented by Milton Friedman, a widely respected economist. Members
of this school maintain that the main objective of business is to produce goods and services effectively
and to make as much money as possible for its economic performance, not social activities. They
further argue that socially oriented activities weaken the firm's goals of profit maximization. Each time
the business money is spent for such activities as Community renewal, hiring and training the
minorities and hard-core unemployed, granting scholarship, etc., profit opportunities are missed.
Money spent in such programmes could be better spent in more aggressive advertising and selling or in
improving production efficiency, which will definitely increase profit potentials. And as long as
business goes about its operations orderly, morally and legally, it is socially responsible, since the
goods and services it provides are in the interest of the society. Many scholars, namely, Koontz et al
(1986:51 52), Steiner (op cit: 160 170), have contributed immensely to the controversy. Thus, views
and contributions have been summarized below.
Justifications for business Social Engagement
1. Changed Public Expectations of Business: Public needs have changed and perceptions have
changed in this area. Society has given business its charter to exist, and the charter can be amended or
revoked at any time that business is failing to live up to the expectations and needs of society.
2. Better Environment for Business: Creating a better social environment helps both the business and
society. By better neighborhoods and prospects for work the community profits. On the other side,
cleaner and safer neighbourhoods signify a more stable community to work in. Fewer unemployed
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persons reduce the chance of social unrest and prove additional incomes to purchase the firm‘s product
or services. Better educated members of the community provide a more attractive labour pool from
which to draw the personnel.
3. Avoidance of Government regulation: Social participation discourages further oversight and
interference by government. Oversight is costly for businesses and limits their flexibility in decisionmaking. Avoidance government regulation results in greater freedom and more flexibility in business
decision-making.
4. Power: As business organizations grew in economic power, they grew in social power as well.
Hence their social obligations also have evolved. Social influence and social responsibilities form an
equation which, when the power of the organization increases, must be balanced.
5. System Interdependence: Modern society is an interdependent system, and the internal activities of
the enterprise have an impact on the external environment for example, the petroleum refinery which
produces gasoline, kerosene, wax, diesel oil, naphter, atmospheric residues, etc., is so interwoven with
society in terms of its effects on society that it must be concerned with ecology, minority jobs and a
host of other social problems.
6. Public Image: Society involvement creates a favourable public image for the business. Good
public image enables the business to attract more customers, better employees, investors and other
benefits.
7. Stockholder Interest : Social involvement may be in the interest of stockholders. This is because
their enterprise has favourable public image and is subject to less government control.
8. Unknown Profits:Challenges might become profits that may not have been known, for example,
after being re-processed, empty soft drink bottles, steel scraps rubber tubes, used paper etc.
9. Business has the resources:The argument here is that business has valuable resources which could
be applied to social problems Therefore, society should use these resources. Specifically business uses
its talented managers and specialists, as well as its capital resources, to solve some of society's
problems.
10. Prevention is better than cure: It is better to prevent social problems through business social
involvements than cure them. It may be easier to hep hard-core unemployed than to cope with social
unrest and high crime rate.
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Arguments against social involvement of business
1.
Profit Maximization :The primary responsibility of business is to maximize profit by focusing
strictly on economic activities, and it is socially responsible so long as it remains within the rule of the
game.
2.
Costs to Society for Social Responsibility: Eventually, Society must pay for social involvement of
business through either higher prices or the firm's product mix provides less consumer satisfaction.
Social involvement would create excessive costs for business, and the citizens of the society should be
willing to pay for these costs.
3.
Difficulty in Measuring Social Actions: Social actions are often very difficult to measure. There is
always the problem of comparing potential benefits with potential costs of social actions to business.
4.
Weakens International Balance of Payments: Social involvement can create a weakened
international balance of payments situation. The costs of social programmes, the argument goes, would
have to be added to the price of product. Thus, Nigerian companies, with substantial social costs, and
selling in international markets would be at a disadvantage when competing with companies in other
countries which do not have much social costs to bear.
5.
Business has Enough Power: Business has enough economic power, and when it takes on
additional non-economic power, it will increase its overall power and influence. The result could be a
society dominated by the business community, if this happens, the society as a whole stands to lose.
6.
Lack of Social Skills: Business people lack the social skills to deal with the problems (that is,
social problems) of the society. Their training, experience and exposure concern economic matters and
their skills may not be pertinent to social problems.
7.
Lack of Accountability: There is lack of accountability of business to society. Business is only
accountable to shareholders. As such, it is unwise and unfair to give businessmen responsibility for
areas where they are not accountable. Accountability should always goes with responsibility, and it is
poor social control to expect otherwise Unless the society can develop mechanisms which establish
direct lines of social accountability from business to the public, business must stay clear of social
activities and pursue only its goal of profits where it is directly accountable through the market system.
8.
Lack of Broad Support: Although many people desire business to become more socially involved,
others oppose the idea. There is lack of agreement among various groups – general public,
intellectuals, business people themselves. These groups have different viewpoints about business social
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responsibility, and these could cause frictions, and hostile environment for business to operate in.
While these arguments and counter arguments continue, our opinion in this aspect of management is
that business should be socially responsible. In the next section, we shall discuss the various groups
business is socially responsible to.
Areas of social responsibilities
Onuoha (1990, 355) is of the opinion that, besides carrying out its normal and legal economic
activities, business should also take on some social business actions, Liu & Zhang (2017) also recently
discovered it consistent. In fact, the areas of business social responsibilities keep on expanding on a
daily basis. In this section, business social activities will highlighted under the following groups that
demand corporate social behaviour -customers, stockholders, employees, suppliers and distributors,
community, government, minorities and disadvantaged persons.
Customers: A major task of business is to find out the needs of its customers and try to meet
them. Customers want and desire high quality products and services, well packaged and at affordable
price. Business will establish reality when it comes to lending, advertisement and all businesses. For
example, promotional statements stated in ads, quality, purpose, price, etc., should be factual and
assurances should be honored. Business people should not only practise in the business context alone,
but also in terms of their social implications.
Stockholders: are usually the owners of the business. Therefore, they should be protected by
management from fraud (dividends) on their investment or they may be compelled to sell their stocks
through lower stock prices. If that happens the company's capital could be dried up Profit maximization
and dividend strategies should be followed in accordance with other social issues, which would in
effect adversely or favorably impact the value of the business.
Employees : Employees have been described as the most valuable assets of any organisation when
compared to any other factor of production - land, capital, materials etc. Employees desire equitable
and just compensation and other fringe benefits that are commensurate with their efforts and that will
also make them satisfied on the job. There should be a health work environment for example improved
occupational health and safety, good relationships with co-workers, the managers and the company, job
security, etc. Employment policies should be able to remove the hazards of old age sickness through
pension and pension related schemes. Business should provide employees opportunity for advancement
with the help of up-to date training and development programmes. Business should also be interested
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in the following issues relationship of pay to productivity; the responsibility of employees to,
managers; authoritarian structures; and involvement of employees in decision making (i.e. participation
management),
Suppliers and distributors: Suppliers provide essential resources to business to enable it operate
efficiently. Distributors help businesses to distribute goods and services to the right places and at the
right time. Business should therefore resist favouritism and prejudice when dealing with vendors and
middlemen. In which case, they also have the right to make profit. Business should strike an equitable
bargain with them to enable them earn a proper return on their services or investments. Business
should also endeavour to meet all economic agreements (such as efficient and prompt payment of
debts) to them. As a matter of fact, it is in the interest of business to do so, in order to avoid loss of
confidence from these parties. Loss of confidences may entail refusing to provide business with
essential resources, such as capital, raw materials, information etc. Furthermore, a mutually honest
relationship with these parties may yield new ideas for product development and distribution.
Community: An organisation‘s community may be local, nation or worldwide. According to (Liu
& Zhang, 2017), "It has become the vogue on the part of well-meaning Nigerians in recent times, to
stress and call out to business people to promote and improve the communities where they do business
and make profits. Such actions are ethical and serve to improve the image of business". Nigerian
business organizations are now required to address themselves with question such as urban renewal
and development which include the following provision of water, electricity or access roads; financial
and leadership support for civil programmes and charities; building or improving, low-income housing;
building shopping centres and donating them to the community; improving transportation systems;
engage in noise control; pollution abatement; direct financial aid to schools (private and public),
including scholarships, grants and tuition refunds; support for increase in school budgets; donation of
educational equipments and skilled personnel; assistance in curriculum development; aid in
counselling and remedial education; and the reduction of business's role in the community power
structure and so on.
Government: The government enacts laws that make it possible for business to exist, operate and
own property. Government also supports and assists industry by means of its monetary and fiscal
policies, delivering services at subsidized rates, issuing and guaranteeing loans, etc. Company has
responsibilities to government in exchange for all of those privileges. Such responsibilities should
include providing the financial support required for maintaining the system of government. This can be
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achieved if business organizations pay their corporate taxes and other financial obligations. Business
must also obey the laws of the land, and must also develop a system of law which provides the best
possible climate for business enterprise. Other areas of business social responsibilities to government
include; helping improve management performance at all levels of government; working for the
modernisation of the nation‘s governmental structure; facilitating the reorganization of government to
improve its responsiveness and performance; advocating and supporting reforms in the election system
and the legislative process designing programmes to enhance the effectiveness of the civil services;
promoting reforms in the public welfare system, law enforcement, and other major government
operations; cooperating with the government in developing more effective measures to control inflation
and achieve high levels of employment; supporting fiscal and monetary policies for steady economic
growth, (Steiner 157-158) and so on.
Minorities and disadvantaged personnel
Every nation has these twin problems of minorities and disadvantaged persons to tackle. Nigeria
is not an exception. Business through some of its economic or social actions can help the government
in this direction. Ways in which business could be of immense assistance have been identified by
Davis and Blomstrom p.9 and they include:
i.
Training of hard-core people out of job
ii.
Equal work opportunities and minority employment quotas
iii. Operations of programmes for alcoholics and drug addicts
iv. Employment of persons with prison records
v.
Building of plants and offices in minority areas
vi. Purchasing from minority businessmen
vii. Technology retraining of displaced workers or affected by automation or other causes of
joblessness
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Factors Responsible for the Neglect of Social Responsibilities
In the preceding section, we saw a very wide spectrum of business activities which could well
constitute business social responsibilities. Yet it has been found out that most Nigerian organisations
neglect this crucial aspect of organizational management. This non-challant attitude to social matters is
often to the dismay, disappointment and irritation of well-meaning Nigerians. Some of the major,
reasons responsible for this neglect include:
1. The Majority of Nigerian business concerns are in the small scale category. As a matter of fact,
small business is the dominant from of business enterprise in any economy whether developed or
developing. The small nature of these businesses can readily be observed from their (i) number of
employees (ii) sales volume, (iii) financial strength, (iv) initial capital outlay etc. Poor financial
position makes it economically unwise for them to add social costs to their operations.
On the other hand, the so-called large enterprises that have the financial resources are not very
keen on the issue of social responsibility. This is because many of the big businesses in Nigeria
subsidiaries of foreign multinational corporations. Therefore, they are financed, managed and
controlled by their parent companies whose primary pre occupation is profit maximization. These
organisations assume and see social actions as patriotic and nationalistic activities that should only be
undertaken by indigenous business people. Again, some of the foreign business operating in Nigeria
come from countries, for example, Britain, India, Lebanon, Far East etc., where the consciousness and
campaign for business social responsibilities are at best in their formative stage (Nwachukwu 1988,
273-7).
2. The main goal of every business concern is profit maximization (or profit optimization). But
the way Nigerian businesses go about this objective had left much to be desired. For example, Nigerian
companies engage in a lot of labour malpractices like underpaying workers (despite the existence of
the Minimum Wage Act and rising inflation), and refusal to employ handicapped persons. A lot of
them do not make provisions for recreational facilities for their employees, and there is lack of decisive
accommodation policies. Yet most of them do not have adequate transport, safety and health
allowances for workers. They do not take training and development of their employees serious.
Other malpractices of our business organization as listed by Onuoha (1987) include; declaring low
profits to avoid taxes, inflating production and business expenses ih order to reduce published profits,
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making large provision for bad and doubtful debts (our financial institutions, mostly banks, are the
major culprits in this regard), and teleguiding of external auditors (sometimes bribing them) to avoid
exposure of certain some business enterprises in the drive for excessive profits engage in certain antisocial/commercial practices, such as false and mendacious advertising, adulteration of goods,
misbranding of products and the sale of dangerous and harmful goods. Often companies stock pile
(hoard) products to create artificial scarcity, which enable them to make exorbitant profits. Finally,
some companies, especially multinational corporations lobby and bribe government officials to secure
their personnel appointments to government ministries, commissions, panels and tribunals and getting
contracts.
3. Apart from the subsidiaries of multinational corporations in Nigeria, all other big organisations
are owned by government. For example, the government owns major transport network- air, rail and
port facilities, broadcasting (radio and television), health and postal services, production and
distribution of coal and electricity, iron and steel complexes, oil drilling, refining and distribution
(Nwachukwu :275). The assumption here is that since these large organisations belong to the society,
that they are socially responsible, more so, when profit is not their pre-occupation. Instead of catering
for the citizens welfare, however, most of these organisations have been earmarked for either
privatization or commercialization, with the Federal Military privatization programme. See Decree 25
of 1985 of 1985.
4. The Nigerian management style to a great extent lacks professionalism. Many Nigerian
managers do not believe that social responsibility is very relevant area of organisational management.
It should however be noted that their training and experience had not exposed them to the sensitive
nature, of social responsibility. They should be made to realise that the society‘s expectations about
business has changed towards business getting actively involved in certain social actions. And these
actions should purposely be carried out to benefit the members of the society.
5. From all indications, the Nigerian society expects little by way of social responsibility of
business. For example, most laws in Nigeria promulgated to control and regulate business activities are
not seriously enforced. To obtain compliance, Government in most Cases use persuasion. This might
account for the reason why the Central Bank of Nigeria (CBN) has moral suasion as one of the tools
for getting financial institutions in the country to comply with its monetary policies.
The following laws are grossly abused in this country without any commensurate punishment from
government.
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1)
The Nigerian Enterprises Promotion Decree 1972, 1973, 1974, 1976, 1977, 1989.
2)
Food and Drugs Decree, 1974.
3)
Minimum Wage Act, 1981.
4)
Patents and Designs Decree, 1970.
5)
The Immigration Act, 1963.
6)
Trade Marks Act.
7)
Company Income Tax Act.
8)
The Factories Act, 1958.
Weights and Measures Act.
9)
The Workmen‘s Compensations Act 1958
10) Foreign Currency Domiciliary Accounts Decree 1985 etc
There are also many other areas of business activities that have no law controlling them, for
example, noise control and pollution. Thus Newswatch (1989) is of the opinion that "there are no
guidelines Attempts at formulating for industrial effluent discharge in Nigeria. Attempts at formulating
regulations have so far not led to the enactment of any environmental protection law for the country.
The result is that almost all industries dispose of toxic wastes anywhere they choose and are, therefore
all guilty of environmental pollution. Experts even say that our oil refineries are among the biggest
pollutes in the country.
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