Corporate Governance for the Companies - Essay Example

Corporate Governance and Improving the Performance of Companies Table of Contents I. Introduction II. Discussion III. Conclusion References I. Introduction This paper investigates the role of corporate governance in enhancing the performance of companies, taking off from select academic literature to gain insights into just how corporate governance shores up the performance of firms. The general findings in the literature seem to support the intuitive notion that the better the corporate governance systems are in a given organization, the better its corporate performance, and by corporate performance is here generally defined as the performance of a firm relative to its organizational targets. The common measure for corporate firms is of course financial performance. That said, while intuitively there is validity in thinking that corporates perform better on their chosen measure the better governed those corporates are, the literature also offers a wealth of other insights that validate the intuition, but also offer other insights that cannot be had without a thorough and sincere investigation into the correlations and the relationships between the two. For instance, the literature describes that over time, the corporate performance gains to be had from improving governance systems and execution of governance strategies diminish over time, so that in theory there is also a maximum amount of gain to be had from improving governance. This is to say of course that governance is a vital component in improving the performance of companies, but obviously other factors are also at play in corporate performance. Intuitively we know this, that in tech for instance governance is important, but so are research and development, innovation, and other vital ingredients. Going back to corporate governance, meanwhile, the goal of this paper is to investigate the many aspects of the relationship between the governance of corporations and the performance of companies relative to their chosen metrics of performance (Renders, Gaeremynck, and Sercu 2010, pp. 87-106; Adewuyi and Olowookere 2013; Vintila and Ghergina 2012; Gupta and Sharma 2014). II. Discussion Data from a study of European firms confirm the positive relationship between corporate governance on the one hand and corporate performance on the other. For this study data was gathered on both variables with corporate performance being measured in terms of both financial performance metrics as well as market value metrics. The data suggests a strong correlation between the two, confirming an intuition in the academic literature that had not been thoroughly validated with real-life data up until that point, at least as the study claims. The study is noteworthy in that in an environment like Europe, where reporting systems for financial performance are robust and well-monitored, given that Europe is mature and its financial systems are in compliance with international accounting rules and standards. The emphasis too on firm performance based on market valuations of the firms makes good sense given this well-regulated environment. The short of it is where an environment relies on good accounting standards and where stock markets rely on such high quality data for financial performance, then one can establish good correlations between corporate performance on the one hand and financial performance on the other. In other words the operating environments of the European firms in this study are mature, stable, and regulated well, adhering to international standards for financial reporting, financial performance measurement, and the market valuation of the shares of such European firms in the public bourses. The same can be said for governance systems, which likewise adhere to international standards and the rule of law. In such an environment, the general findings are that there are strong correlations indeed between corporate governance and firm performance. One can say, stepping back, that in mature economies and mature democracies with stable governments and financial systems that are well-regulated and world-class, that there are indeed positive correlations between governance and firm performance (Renders, Gaeremynck, and Sercu 2010, pp. 87-106). The study above raises questions though on just how much corporate performance aids in improving corporate performance, in environments where the regulatory regime is not as mature as in Europe, and where financial reporting is also not as ideal as in Europe and other developed economies. After all, corporate governance systems do not exist in a vacuum, and neither do firms. They operate within the context of government regulations, and societies that may have different rules and ways of doing business. In the context of developing economies, for instance, does governance help? The previous study offered clues, in that institutional or regulatory quality has an impact on the relationship between corporate governance and corporate performance, even in developed economies like Europe (Renders, Gaeremynck, and Sercu 2010). The surprising findings in other economies, such as in India and in South Korea seems to offer insights into just how much impact the operating environments have on the correlations. The findings are that for India and for South Korea, corporate governance seems to have negligible impacts on financial performance. This is contrary to the findings of the European study, and raises important questions as to exactly how corporate governance affects corporate performance in different markets and in different regulatory and government regimes. In the case of the two latter countries one can say that there may be other forces at work that impact firm performance, and that there seems to be disconnect between what governance does and how the operating environment either negates or makes impossible for governance to make any impact on firm performance for South Korean and Indian firms. Looking at the study in greater detail., one can glean insights into just how the somewhat different environmental variables in those two countries are able to negate the supposedly positive impact of governance on company performance, as measured both in terms of the share prices of the firms and on their financial performance as reflected in their financial statements (Gupta and Sharma 2014). Another study supports the findings of the latter study above in not being able to find positive correlations between measures of corporate governance, as they are officially determined in some indices that are in use by investors in the United States, and corporate performance as measured in terms of financial performance and market share price performance. This is not in Europe, but in a market that is also very developed and western, and arguably the pacesetter globally in terms of regulations pertaining to financial markets and overall government regulations of the economy and of corporations. This is the US market, and the data was gathered from a cross section of listed firms in the major US stock markets. The data suggests that the correlation between governance measures on publicly used governance metrics and firm performance is in fact negative. Put another way, the data suggests that there is an inverse relationship between financial performance and governance ratings for firms. The further implication is that the public governance ratings in use by investors may either be flawed, or else that in the United States good governance actually hinders corporate performance, contrary to the intuition. The study does note that in the main it is worthwhile to investigate just how accurate the governance ratings are, and whether those public governance ratings for firms actually reflect the internal reality of those firms as far as governance systems are concerned. That said, assuming that the governance ratings are a good approximation of the quality of the governance in those firms, then one can say that in the US, as in other countries, governance is inversely correlated with the performance of firms (Vintila and Ghergina 2012). In a Nigeria study the assumption from government actions relating to corporate governance is that corporate governance is a good thing, so much so that it enforced the adoption of a corporate code template among Nigerian companies by law. The assumption is that this template ought to be good for all Nigerian firms in the long term, and that therefore all Nigerian firms should adopt the template. By good presumably is meant good in terms of corporate survival and profits. On the other hand the findings from the study are that while theoretically the governance template is a good thing, in practice phasing in the template in Nigerian firms had mixed results, with the improvements in firm performance being negligible, and probably compromised by the poor management of the change process as more and more firms adopted the governance template. More studies need to be done in the Nigerian case, therefore, to determine whether or not corporate governance systems do enhance the performance of corporations (Adewuyi and Olowookere 2013). III. Conclusion From the studies considered in this paper it is not apparent or unanimous that corporate governance quality has a positive correlation with company performance. Indeed, in many geographies, both developed and developing, there are negative or negligible correlations between the two. The exception is Europe, where good governance results in better corporate performance. The overall findings are contrary to intuition and the theoretical assumptions in academic literature, that claim positive correlations between governance and firm performance. The reality is more complicated, as can be gleaned from the above discussion (Renders, Gaeremynck, and Sercu 2010, pp. 87-106; Adewuyi and Olowookere 2013; Vintila and Ghergina 2012; Gupta and Sharma 2014) 1 2 3 References Adewuyi, A. and Olowookere, A. (2013). New corporate code and immediate performance change of the Nigerian firms. Corporate governance: the international journal of business and society 13 (2). Gupta, P. and Sharma, A.(2014). A study of the impact of corporate governance practices on firm performance in Indian and South Korean Companies. Procedia- Social and Behavioral Sciences 133. Renders, A., Gaeremynck, A. and Sercu, P. (2010). Corporate-Governance Ratings and Company Performance: A Cross-European Study. Corporate Governance: An International Review 18 (2). Vintila, G. and Ghergina, S. (2012). An Empirical Examination of the Relationship Between Corporate Governance Ratings and Listed Companies’ Performance. International Journal of Business and Management 7 (22). Read More