Corporate Governance Impact on Firm Performance

Corporate Governance Impact on Firm Performance
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  Corporate Governance Impact on Firm Performance: Corporate governance has also been defined as a system of law and sound approaches by which corporations are directed and controlled focusing on the internal and external corporate structures with the intention of monitoring the actions of management and directors. In contemporary business corporations, the main external stakeholder groups are shareholders, debt holders, trade creditors, suppliers, customers and communities affected by the corporation's activities. Internal stakeholders are the board of directors, executives, and other employees. Much of the contemporary interest in corporate governance is concerned with mitigation of the conflicts of interests between stakeholders. Ways of mitigating or preventing these conflicts of interests include the processes, customs, policies, laws, and institutions which have an impact on the way a company is controlled. An important theme of governance is the nature and extent of corporate accountability. A related but separate thread of discussions focuses on the impact of a corporate governance system on economic efficiency, with a strong emphasis on shareholders' welfare. In large firms where there is a separation of ownership and management and no controlling shareholder, the principal  –  agent issue arises between upper-management (the agent ) which may have very different interests, and by definition considerably more information, than shareholders (the principals ). The danger arises that rather than overseeing management on behalf of shareholders, the board of directors may become insulated from shareholders and beholden to management. This aspect is particularly present in contemporary public debates and developments in regulatory policy. Followings are the main principles through which corporate governance has a positive impact on firm performance. Rights and equitable treatment of shareholders : Organizations should respect the rights of shareholders and help shareholders to exercise those rights. They can help shareholders exercise their rights by openly and effectively communicating information and by encouraging shareholders to participate in general meetings. Interests of other stakeholders : Organizations should recognize that they have legal, contractual, social, and market driven obligations to non-shareholder stakeholders, including employees, investors, creditors, suppliers, local communities, customers, and policy makers.  Role and responsibilities of the board : The board needs sufficient relevant skills and understanding to review and challenge management performance. It also needs adequate size and appropriate levels of independence and commitment. Integrity and ethical behavior : Integrity should be a fundamental requirement in choosing corporate officers and board members. Organizations should develop a code of conduct for their directors and executives that  promotes ethical and responsible decision making. Disclosure and transparency : Organizations should clarify and make publicly known the roles and responsibilities of board and management to provide stakeholders with a level of accountability. They should also implement procedures to independently verify and safeguard the integrity of the company's financial reporting. Disclosure of material matters concerning the organization should be timely and balanced to ensure that all investors have access to clear, factual information. Relationship between Corporate Governance and Firm Performance: In respect of board structure, board size is significantly and negatively related to firm  performance, implying that, in a large size board, the diversity of insiders’ opinion  has a negative impact on making decisions, which is detrimental to firm performance. Nevertheless, board independence is positively and significantly related to firm performance, suggesting that the more independent the board is, the better firm performance would be. On the other hand, CEO duality is negatively and significantly related to firm performance, inferring that, under the condition that CEOs serve as executives, the board would likely fail to  be an objective supervisor, correspondingly putting firms at a disadvantage. Board’s level of experience is positively correlated with a firm’s pe rformance.   It is argued that  board members with a higher age average will have much more experience compared to a younger age average. This experience is expected to positively contribute to the better  performance of a firm. However, older-age board member appears to be more aggressive and dictatorial with decisions. These characteristics of board members may result in risky decision making, which may undermine a firm’s performance.  Concerning ownership structure, insider ownership has a positive and significant relation with firm performance, suggesting that higher insider ownership may reconcile authorities’ and outside shareholders’ interests, consequently making firm  performance better. Independent directors will contribute positively to a firm’s perfor  mance. There is a positive correlation between management’s compensation and a firm’s performance.   Board’s educational level will positively contribute to firm’s performance.    Global Corporate Governance: We recognize that accepted standards of corporate governance differ between markets but we  believe that there are sufficient common threads globally to identify an overarching set of  principles. The primary objective of corporate governance activities is the protection and enhancement of the value of clients’ investments in public corporations. Thus, these principles focus on practices and structures that consider being supportive of long-term value creation. We discuss below the principles under six key themes. The six key themes are: ►  Boards and directors: ►  Auditors and audit-related issues ►  Capital structure, mergers, asset sales and other special transactions ►  Remuneration and benefits ►  Social, ethical and environmental issues ►  General corporate governance matters
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