Correlation between Organizational Performance and Corporate Governance - Literature review Example

CORPORATE GOVERNANCE Student‘s Name: Course Title: Date: Introduction Corporate governance is defined differently by different scholars. Donaldson (2012) defines corporate governance as a collection of institutions, policies and rules influencing the controllability of a firm. According to Edwards and Clough (2005) corporate governance refers to the ways in which an association is controlled and directed. Corporate governance concerns definition of processes and structures with an aim of monitoring as well as facilitating organization’s effective management and mechanisms. This guarantees legal acquiescence and stop unlawful or improper behaviour. In addition, OECD defines corporate governance as a packed relationships set among shareholders, board and management of a company. It gives the structure by which company’s objectives are set and determine the methods of achieving the set objectives as well as performance monitoring (Alena et al., 2011). On the other hand Kemp and Parto (2005) view sustainability as a process of adaptive change that is socially instituted and wherein innovation is an essential element. According to Donaldson (2012) the governance theory aims at understanding and influencing behaviour and at least serve relatively as organization normative theory of design and choice. This implies that policies, rules and other governance elements are what guide or control the firm. Corporate governance focuses extensively on control mechanisms and control issues of the firm from the top downward. It includes all firms’ types and its meaning would broaden to cover every non-economic and economic activity (Bechinann et al., 2011). There are two dimensions involved in corporate governance which are governing body or board responsibility. These two dimensions include performance and conformance. Performance dimension entails monitoring of CEO and organization performance. It involves setting goals for the organization and coming up with strategies that will assist in attaining the goals (Claudia & Stafen, 2010). Additionally, the strategies ensure the organization is responsive to varying demands of environment that in comprise risk of management and prediction. The main objective of this dimension is to enhance performance of an organization. The second dimension is conformance. It involves compliance of stakeholders with industrial standards, corporate governance, legal requirements, and accountability (Cory, 2012). Correlation between Organizational Performance and Corporate Governance Governance practices is firm’s ability to offer a stakeholder set accountability relationship plus the arrangement setting, monitoring and achieving performance as well as objectives. Distinctively, governance practice is apprehensive of recommended practices and performance adoption to raise fiduciary accountability as well as financial accountability and improve social corporate responsibility by endorsing disclosure of financial information of firms and others (Hoje & Maretin, 2012). Firms with higher governance practices have a high possibility of acting, behaving and doing commerce activities with stakeholders in mind. They appear to improve the directors’ board oversight function and restore confidence of the public in the financial reporting integration. In addition, governance practice can as well be defined as constraints set on stakeholder and managers as they negotiate for the firm’s values distribution. It is constraints continuum on shareholders, directors’ board and management. Good practice lowers interest conflict between minority insiders as well as stakeholders, and lean to raise its value of the firm by dropping asymmetry of information and raising efficiency of management (Phapruke & Phaithun, 2011). Similarly, governance practice contains an essential effect on enhancing survival of the firm. It develops into an important driver of determining and explaining a firm survival level. For the aspect of accounting, extra governance practice appears to contain an effect on accounting sustainability as well as disclosure quality. Firms that contain extra governance practice appear to offer higher accounting sustainability and quality of disclosure (Ussahawanitchakit & Intakhan, 2011). According to Edwards and Clough (2005) governance practice is comprise of ownership influence and structure, relations as well as rights of financial stake holders, presentation and transparency of finances, board processes and structures. Additionally, they also practice social learning that comprises relationships and action of an organization as well as social conduct of communication. Edwards & Clough indicates that governance practice act as a background of accounting sustainability as well as quality disclosure of most organizations in Thailand. The organizational performance and corporate government connection lies in governance multidimensional nature. When conceived narrowly, corporate governance entails agreement of stakeholders with legal protection, and obligation against organizational failure or fraud. Without mechanism of governance in place especially a board to control and direct, managers may run off with the gains. Therefore good governance lowers the chances of poor performance of an organization (Markus, 2010). The good governance definitions emphasizes on its contribution to improve performance of an organization by highlighting the board strategic role. Legal agreement, fulfilling requirements of accountability, ongoing financial control and scrutiny are basic features of excellent corporate governance (Hans et al., 2009). Nevertheless, a board with high performance will as well play strategic function. Excellent corporate governance strategizes for the upcoming events, keep pace with external environment changes, build and nature primary external associations and be attentive to openings to expand the business. Basically, the board does not only protect and monitor performance but also enhances and enables performance (Edwards & Clough, 2005). Improved governance is a requirement for and possibly also a product of stepladder towards sustainability. More is anticipated form good corporate governance. As defined by European commission, excellent governance comprise of efficiency, effective coherence, accountability, participation, openness and a higher understanding to the instantaneous context which is assured by subsidiary (Reynolds, n.d.). To attain sustainability there are other additional requirements that need to be attended to. These requirements include ways of internalizing outside costs, as well as ensuring policy integration consolidations, options evaluation and handling trade-offs. The definition of good governance as given by commission emphasis on institutional role as entries which are highly seen as being in a higher profile and at any rate today, insufficiently in the ordinary citizens reach. This governance view seems primarily concerned with reducing hierarchy and bureaucratization (Edwards & Clough, 2005). Policy Integration and Performance An essential interrelations issue is the government policies coordination, complementary as well as corresponding position and plans of other actors of governance. Modern state evolution has been in the direction of a raised spectral specialization degree to handle various problems. Specialization has assisted in coming up with valuable answer to certain challenges though, it contains a number of disadvantages. Sustainability demands integration of policy in conjunction with non-government and governmental institutions good interaction and long term view creation in government. successful integration is based on realistic choice making focuses on acceptance of shared overall goals, policy options selection ,reasonable consistency cooperative design implementation and positive feedback where possible (Kemp & Parto, 2005). According to World Bank (n.d.) excellent governance raises access of a company to all external finance forms that include private, public, international and domestic. Additionally, firms looking for financial access from global sources for instance global equity listings need to get better governance so as to adhere to more stringent requirements of listing. Companies that are well governed get higher valuations in the market than poorly governed companies. Better processes and structures of governance improve decision making in companies of all forms an aspect that influences their long-term prosperity. Focusing on excellent corporate governance performs in customers companies permit international financial corporation (IFC) to handle risks and enhance client’s value addition. Apart from individual customers’ companies’ benefits, working to better governance adds more roughly to mission of IFC to endorse investment of private sector and reinforce developing countries’ capital markets (World Bank, n.d). According to Kocmanova et al. (2011), corporate sustainability is adding importance in respect to company performance measurement. The author argues that corporate governance, economic, social and environmental factors are at business strategies and corporate government heart. They are daily operation part and package that push for opportunity seizing by stimulating effort for achievement as well as effort as risk and threats indicator. Thus they should turn to be voluntary business reporting part on links assessment between economic and environmental performance assessment, the social performance assessment and corporate government relation (kocmanova et al., 2011). According to Alexander (2004, the bank owners and managers demonstrating intention and efforts to implement excellent governance have a chance to raise market credibility. Consequently, they will gather funds at reduced risk and reduced cost. It is evident that improved corporate governance leads to great performance. An investigation carried out by Alexander to evaluate the interaction between excellent corporate performance and bank performance indicates that there is a positive relationship between the two. A research conducted on performance of seven firms in developing nations indicated that there is a great firm’s valuation in nations with better minority shareholders protection. Another research conducted to investigate level of performance of 14 new market stocks and analyse corporate governance contribution in nations with poor legal surrounding indicated that, improved corporate governance correlate greatly with improved performance of operation as well as higher evaluation of the market (Alexander, 2004). Governance Theories and Performance The roots Stewardship theory are based on sociology and psychology and it is defined by Abdullah and Valentine (2009) as a theory that maximize and protects wealth of shareholders by performance of the firm, since by doing so the utility functions of steward are capitalize on. In this view, stewards represent managers and executives of a company operating on behalf of stakeholders, to safeguard and make gains for them. This theory stresses on top management role that is as steward, incorporating their objective as organization part. The perspective of stewardship proposes that stewards are motivated and satisfied when success of an organization is achieved. This theory distinguishes the structural importance that authorizes the steward and gives utmost autonomy created on trust. It emphasizes on executive or employees position to operate extra autonomously so that the returns of stakeholders are maximized. Certainly, this can lower the costs meant to control and monitor behaviours. For directors and executives reputations as organizations’ decision makers to be protected, they are inclined to safeguard the corporation to maximize fiscal performance and the profit of stake holders. In this context, the performance of the firm is believed that it can directly affect their individual perceptions of performance. Some scholars believe that finances are returned to the investors by the managers in order to build an excellent reputation that would grant them future entrance into the market. Moreover, stewardship theory proposes chairman and CEO role unification in order to lower costs of agency and to obtain a higher role in organization as steward (Sun-A & Yong-Shik, 2012). Stakeholder theory refers to any individual or group who is affected or can affect organization objectives achievement. This theory proposes that organizations’ managers contains relationships network to serve. This network is in comprised of business partners, employees and suppliers. According to the scholars the theory tries to address stakeholder’s group requiring and deserving attention of management. The groups take place in business to acquire benefits. The theory centres on managerial judgment making, as well as all stakeholders interest contains intrinsic worth and no interest sets assumed to control others (Ibid, 2012). The theory of resource dependency concentrates on board directors’ role in giving firm access to needed resources. The theory centres on role played by directors in securing or providing an organization with important resources by connecting them to the external surrounding. There is an argument that the resources provision improves functioning of an organization, survival and performance of the firm. The theory of transaction cost tries to see the firm like an organization containing individuals with varying objectives and views. The transaction theory underlying assumption is that the companies have expanded to effect market substitute in determining resources allocation. This means the firm structure and organization can determine production and price. The transaction theory analysis unit is transaction. Thus people combination with transaction proposes that the managers of theory of transaction cost are opportunists, and they organize transactions of the firm to their comfort (Abdullah & Valentine, 2009). Case Study: Corporate Governance vis-à-vis Firm Performance A study carried out in a Nigeria commercial bank known as WEMA Bank with its head Quarters in Lagos and with six other regional branches head quarters is used to demonstrate the relation between governance practice and bank performance. The descriptive research measures risk management and corporate governance. Corporate governance is evaluated using the indices that include compliance and audit, policies and practices of corporate governance. The performance of the bank is evaluated by equity and assets returns in comparison with performance against benchmark of the industry. Corporate is an independent variable that influences the performance of the bank. On the other hand, risk management relies on corporate governance (Akindela, 2012). The performance of the bank which is a dependant variable is resolute by exogenous changeable for instance equity and assets returns of past years as well as in comparison with benchmarks of the industry. Every variable is weighed by use of good structured questionnaire. The research involved 3,054 workers of 151 WEMA bank branches networks. Inferential and descriptive techniques of analytical statistic were employed to collect, code, edit as well as organizing data into incidence distribution to get central tendency measuring and variability measuring. It as well involves finding presentation via weighted mean, simple percentage and distributed table. The employment of non-parametric descriptive statistic means is justified by data questionnaire type character. Measurements are taken on high precision ratio or interval scale (Ibid, 2012). Research Findings The research results showed that there is direct relation between risk management and bank performance. Additionally, it established that improved corporate governance results to improved risk management. Further analysis of the collected data indicated that bank performance and corporate governance relates non-linearly. This is weighed by proxy founded on capital adequate ratio (CAR) composite value. CAR affected by CBN as 80% of minimum CAR regulator, as well as other assets and capital ratios meet the stipulations of regulators. Therefore, the bank turns to be unhealthy and lowers its reputation. This may make the public to presume that bank does not have concern on applying excellent corporate governance. However any little effort to better the ratios will require extra cost beyond benefits. A high success performance has been noted in NEMA bank due to better management of risk that emanate from improved corporate governance. The two enhances performance and profitability of the bank, which in turn raises equity returns beyond industrial average (Ibid, 2012). Conclusion Corporate governance concerns definition of processes and structures with an aim of monitoring as well as facilitating organization’s effective management and mechanisms. Sustainability is a process of adaptive change that is socially instituted and wherein innovation is an essential element. There are two dimensions involved in corporate governance which are governing body or board responsibility that includes performance and conformance. Governance practices is firm’s ability to offer a stakeholder set accountability relationship plus the arrangement setting, monitoring and achieving performance as well as objectives. Good practice lowers interest conflict between minority insiders as well as stakeholders, and lean to raise its value of the firm by dropping asymmetry of information and raising efficiency of management. governance practice is comprise of ownership influence and structure, relations as well as rights of financial stake holders, presentation and transparency of finances, board processes and structures. Improved governance is a requirement for and possibly also a product of stepladder towards sustainability. More is anticipated form good corporate governance. An essential interrelations issue is the government policies coordination, complementary as well as corresponding position and plans of other actors of governance. References Abdullah, H. and Valentine, B., 2009. Fundamental and ethics theories of corporate governance. [online] Available at: [Accessed 20 May 2012]. Akindele, R. I., 2012. Risk management and corporate governance performance -- empirical evidence from the Nigerian banking sector. IFE PsychologIA, 20(1), pp.103-120. Alena, K., Jiri, H. and Marie, D., 2011. Corporate governance and sustainability. Economics & Management, 16, pp. 543-550. Alexander, K., 2004. Corporate governance and banking regulation. [online] Available at: [Accessed 20 May 2012]. Beckmann, M., Hielscher, S. and Pies, I., 2011. Commitment strategies for sustainability: how corporations can create value through new governance. Academy of Management Annual Meeting Proceedings, pp. 1-6. Claudia, K. and Stefan, L., 2010. The governance of corporate sustainability. Rotman International Journal of Pension Management, 3(2), pp. 46-51. Cory, S., 2012. Corporate Sustainability Performance Measurement Systems: A Review and Research Agenda. Journal of Business Ethics, 107(3), p. 239-253. Donaldson, T., 2012. The epistemic fault line in corporate governance. Academy of Management Review, 37(2), pp. 256-271. Edwards , M. and Clough, R., 2005. Corporate governance and performance. An explanation of the connection in a public sector context. [online] Available at: [Accessed 20 May 2012]. Hoje, J. and Maretn, H., 2012. The causal effect of corporate governance on corporate social responsibility. Journal of Business Ethics, 106(1), pp. 53-72. Kemp, R., Parto, S. and Gibson, R., 2005.Governance for sustainable development: moving from theory to practice. [online] Available at: [Accessed 20 May 2012]. Markus, R., 2010. Employee participation, corporate governance and the firm: a transatlantic view focused on occupational pensions and co-determination. European Business Organization Law Review, 11(1), pp. 51-85. Hans, E., Jonas, G. and Morten, H., 2009. Toward a behavioral theory of boards and corporate governance. Corporate Governance: an International Review, 17(3), pp. 307-319. Phapruke, U. and Phaithun, I., 2011. Governance practice, corporate citizenship, social learning, and accounting sustainability of listed firms in Thailand: moderating effects of business ethics. Journal of International Business & Economics, 11(3), pp. 1-13. Reynolds, J., n.d. Corporate governance and its contribution to higher standards of accountability and business performance. [online] Available at: [Accessed 20 May 2012]. Sun-A, K. and Yong-Shik, K., 2012. Effect of corporate governance on real activity-based earnings management: evidence from Korea. Journal of Business Economics & Management, 13 (1), pp. 29-52. Todd, A., n.d. Corporate Governance Best Practices: One size does not fit all. [online] Available at: [Accessed 20 May 2012] Ussahawanitchakit, P. and Intakhan, P., 2011. Influences of governance practice and social learning on disclosure quality and accounting sustainability of listed firms in Thailand. International Journal of Business Research, 11(6), pp. 1-12. World Bank, n.d. Corporate governance. 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