CORPORATE GOVERNANCE & FINANCIAL PERFORMANCE
AUTHOR: DHRUV MANOHAR PADGE
ROLL NO.: 109
KOHINOOR BUSINESS SCHOOL
The Role of Corporate Governance in Global Performance & Financial Success
Cosmina (2019) Presented The concept of “global performance” refers to an organization’s success in three key areas: economic, social, and environmental performance. Reynaud (2003) highlights that financial results reflect these dimensions. Corporate governance plays a crucial role in financial performance by influencing management and control systems. Studies show that good governance improves market value, financial transparency, and competitiveness (Klapper & Love, 2012; Feleagă et al., 2011). The capital structure also impacts performance—when ownership is widely spread, managers gain more control, leading to higher agency costs (Shleifer & Vishny, 1989). Conversely, concentrated ownership allows for better monitoring and reduces conflicts, improving performance (Shleifer & Vishny, 1997). Another perspective links corporate governance, diversification, and performance. Diversification can enhance competitive advantage but may also reduce value due to agency conflicts (Ileana, 2008). Overall, corporate governance influences decision-making and financial success.
The Importance of Corporate Governance
Ayobami, Sunday & Fatimo (2020) Presented Corporate governance is a complex and essential system that ensures companies are managed responsibly and transparently. It involves making directors accountable to shareholders while upholding ethics and values. Scholars define it as the structure guiding businesses through the board of directors to protect shareholder interests and maintain trust. In Nigeria, corporate governance is a priority, with regulatory bodies implementing rules to enhance transparency. Financial scandals like Enron and WorldCom have highlighted the need for stronger governance practices to prevent fraud and corporate failures. Good corporate governance fosters accountability, fairness, and better decision-making, ultimately improving corporate performance and stakeholder confidence.
Why Corporate Governance Matters
Seyyed (2022) Presented Corporate governance is the system that helps companies operate responsibly and transparently. It ensures that directors are accountable to shareholders and follow ethical practices. In Nigeria, strong corporate governance is a priority, with rules in place to improve transparency. Past financial scandals, like Enron and WorldCom, have shown why good governance is needed to prevent fraud and business failures. When companies have good corporate governance, they make better decisions, build trust, and improve performance.
Corporate Governance, Corporate Social Responsibility, and Corporate Performance
Li-Hui & Ching (2017) Presented Corporate governance refers to the system by which companies are controlled and directed to maximize value while ensuring transparency and fairness. It helps resolve conflicts between shareholders and managers, with board size, independence, and ownership structure playing key roles in corporate performance. Some scholars argue that larger boards provide more expertise, while others say they lead to inefficiency. The separation of ownership and management can prevent conflicts, but if managers hold too much power, they may prioritize their own interests over shareholders. Corporate social responsibility (CSR) is another factor influencing performance, with mixed findings on its impact—some argue it improves reputation and financial success, while others believe it diverts resources from profitability. Ultimately, good corporate governance and CSR can enhance performance, but the relationship between them remains debated.
Understanding Corporate Governance
Cosmina (2019) Presented Corporate governance refers to the principles, rules, and systems that guide how companies operate, ensuring a balance of interests among stakeholders like shareholders, managers, and employees. It has evolved over time, influenced by economic conditions, globalization, and cultural differences. The World Bank defines it as a mix of laws, regulations, and ethical codes that help companies access funding, lower costs, and improve performance. Good corporate governance reduces conflicts between managers and shareholders, leading to higher profits and better financial stability. Various theories explain its workings: Agency Theory highlights conflicts between owners and managers, while Stewardship Theory suggests managers act in the company’s best interest. Resource Dependence Theory focuses on how critical resources shape decisions, and Stakeholder Theory emphasizes serving all parties involved. Other theories address strategic planning, human behaviour, and ethics in governance. Together, these perspectives help organizations make fair and effective decisions to achieve their goals.
The Relationship Between Corporate Social Responsibility (CSR) and Corporate Financial Performance (CFP)
Eman, Rewayda, & others (2023) Presented Research on the link between CSR and CFP has produced mixed results, influenced by different theories such as stakeholder and agency theories. Stakeholder theory argues that investing in CSR benefits all stakeholders, including shareholders, by enhancing company stability and growth. In contrast, agency theory suggests that CSR can be costly and may reduce financial performance by misusing company resources. Studies in the hospitality industry show varied outcomes—some find a positive relationship, others see no impact, and some identify a U-shaped or inverted U-shaped connection. Differences in results arise due to factors like company size, governance, economic conditions, and research methods. To address these gaps, a dynamic model (GMM system) is proposed to better analyse the CSR-CFP relationship, considering governance practices and macroeconomic factors. Ultimately, CSR can either enhance or harm financial performance, depending on how it is managed and perceived by stakeholders.
Corporate Governance, Board Size, and Firm Performance
Ploypailin, Anwar & Amna (2022) Presented Corporate governance (CG) refers to the relationships and structures that guide a company’s management, board, shareholders, and stakeholders in setting goals and monitoring performance. Different countries have their own CG rules based on their political, social, and economic backgrounds. A key CG factor affecting firm performance is the board of directors, which oversees corporate decisions. Research shows mixed results on the impact of board size on firm performance.
Family Ownership, Corporate Governance, and Firm Performance
Nihayatun, Siti & Atim (2022) Presented Family ownership refers to companies controlled and managed by family members, with different studies setting ownership thresholds (e.g., 5%, 10%, or 20%) to define family firms. Good Corporate Governance (GCG) is essential for company performance, ensuring transparency, reducing conflicts of interest, and protecting shareholders. Companies with strong governance are more efficient and attract investors. Financial performance is commonly measured using Return on Assets (ROA), which indicates how well a company utilizes its assets to generate profit. Firm value, reflecting investor perception, is often assessed using Tobin’s Q ratio, which compares market value to book value. A higher Tobin’s Q suggests better growth prospects, making it a key indicator of long-term performance.
Corporate Governance and Performance in Microfinance Institutions
Nawaz, Ahmad & others (2015) Presented Corporate governance in microfinance has become crucial due to the shift from subsidies to capital funding and the higher risks of mismanagement and lack of transparency. It is based on agency theory, which highlights conflicts between managers and shareholders, and aims to ensure that managers act in the best interest of owners. In microfinance, governance differs due to dual missions, ownership types, and board responsibilities. Leadership, especially the board, plays a key role in decision-making and oversight. The debate on CEO duality continues, with agency theory arguing against it while organization theory supports it for unified command. Female leadership in MFIs is seen as beneficial, given the sector’s focus on women-led businesses. Many MFIs are nonprofits, often weaker in governance than shareholder firms. Research on the link between corporate governance and performance shows mixed results—some studies suggest governance affects performance, while others propose a two-way relationship where past performance also influences governance. Further research, particularly in South Asia, is recommended to explore this reverse causality.
Theories and Role of Corporate Governance
Hoang & Zoltán (2023) Presented Corporate governance (CG) is guided by several key theories. Agency theory highlights the potential conflicts between shareholders and management, requiring mechanisms to align their interests. Stewardship theory sees managers as responsible stewards acting in the best interests of the company and stakeholders. Resource dependence theory emphasizes the company’s reliance on external resources and the need for strong stakeholder relationships. Transaction cost theory focuses on minimizing costs associated with business transactions through clear governance structures. Stakeholder theory argues that companies should consider the interests of all stakeholders, not just shareholders. Research has shown that CG significantly impacts company performance, reduces agency costs, and influences policies. During the COVID-19 crisis, the role of CG in risk management became more critical. Post pandemic, CG continues to be essential, especially in emerging economies like Vietnam. However, research has not yet explored how CG enhances innovation in such environments. This study aims to fill that gap by examining CG’s role in strengthening capital budgeting, knowledge management, and business strategy to drive innovation in Vietnam’s banking sector.
CONCLUSION
Corporate governance is the system that helps companies operate transparently, responsibly, and efficiently, ensuring that managers act in the best interest of shareholders and other stakeholders. It plays a crucial role in financial success by improving market value, transparency, and competitiveness. Good governance reduces conflicts between managers and owners, leading to better decision-making and higher profits. Different ownership structures, like family-owned businesses or widely spread ownership, impact performance differently. Corporate governance also connects to corporate social responsibility (CSR), which can either enhance a company’s reputation and growth or divert resources from profitability. Board size and structure influence firm performance, though research shows mixed results. In microfinance, governance is essential due to unique challenges like balancing social and financial goals. Theories like agency theory, stakeholder theory, and stewardship theory explain corporate governance’s role in managing conflicts, reducing costs, and driving innovation. The importance of governance became even clearer during crises like the COVID-19 pandemic, highlighting its role in risk management and long-term success.
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