The relationship between corporate governance and companies’ performance

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Table of Contents

1. Introduction 1

2. The role of corporate governance in improving companies’ performance 1

2.1. Definition of corporate governance and companies’ performance 1

2.2. The relationship between corporate governance and companies’ performance 3

2.3. The changes in relationship between corporate governance and companies’ performance 5

3. Conclusion 7

4. References 8

1. Introduction

The twentieth century has witnessed the race between two economic systems, or two opposite macro solutions: command economy based on centralized control of the Government, and the market economy relied on the private sector. By the end of the twentieth century, the answer to the above race has become clear: the model of the command economy failed to sustain growth, create prosperity and even improve people’s living standards. Meanwhile, the market economy proved its success in many countries around the world. However, the market economy model still needs the involvement of the government’s regulation (Bush, 1991).

The history has proven that the most successful market economies couldn’t develop spontaneously without intervention and support of the Government. The original market economies were based on the simple production and exchange operating effectively without the intervention of the Government. However, as the external environment has impacted more complexly, the corporate governance appears as a necessity for the effective operation of the companies’ performances. The Government has three distinct functions: intervention, management, and regulation benefits. Despite these limitations, the corporate governance remains one of the important factors improving the activities of the enterprises (Goel, 1994).

2. The role of corporate governance in improving companies’ performance

2.1. Definition of corporate governance and companies’ performance

There are many different definitions of corporate governance and companies’ performance. First of all, corporate governance is defined as “the system of checks and balances, both internal and external to companies, which ensures that companies discharge their accountability to all their stakeholders and act in a socially responsible way in all areas of their business activity” (Solomon, 2007, p. 14). According to the author, corporate governance is a system that affects the internal and external environment of the enterprises, and guides them implement their responsibilities to stakeholders and society within the scope of business. It can be seen that this concept raises an overview of the role of corporate governance, and also refers to the relationship between the corporate governance and companies’ performance due to its direct impact. According to Fernando (2009, p. 14), corporate governance is defined as both broad and narrow perceptions by many authors and organizations. The author lists many different definitions of corporate governance through above perceptions, and then, he gives his own definition of corporate governance. According to him, corporate governance related to “a desideratum to the growth and development of enterprises worldwide” This definition of corporate governance is understood in a broad sense, and it shows the real role of corporate governance. Whereby, corporate governance can create a favorable environment for the development and growth of the businesses. In addition, McGee (2008, p. 244) states a new concept of corporate governance, following the author, “corporate government is the process of protecting the legitimate interests of stakeholders involved with corporate entities.” We can see that the definition of Solomon (2007) and McGee (2008) are same a little bit. It is the target subject of corporate governance: stakeholders. Both authors aim to this subject, and recognize that corporate governance can affect this object through the impact on the companies. Besides, Stolt (2010, p. 2) points out not only the definition of corporate governance, but also the “tripod” of corporate governance, including “owners, managers and the board of directors”. According to the author, they are three main forces affecting on the enterprises. Obviously, they are the leaders of the companies, and then, they can decide everything and provide direction for the companies’ activities in the future. In short, there are many ways to define the corporate governance, but almost of them are towards the stakeholders in the companies.

While various definitions of corporate governance are given, there are not many concrete concepts of companies’ performance. According to Pangarkar (2011), high or low company’s performance depends on good or bad strategy very much. The author emphasizes the important role of appropriate strategies on reaching high company’s performance. Meanwhile, Zotto & Kranenburg’s (2008, p. 155) study indicates that company’s performance includes three factors: “innovativeness, work climate and business performance”. In addition, according to the authors, company’s performance is a “multifaceted concept”. Or the other hands, we can understand this concept by many ways. Moreover, company’s performance can be measured by many specific domains (Andreescu, 2008). According to the author, we can evaluate the company’s performance through leadership management, strategic planning, customers, workforce focus,… This is one of the effective methods to measure the company’s performance in practice.

2.2. The relationship between corporate governance and companies’ performance

As mentioned above, corporate governance has close relationship with companies’ performance. Specially, according to Fernando (2009), corporate governance has a positive relationship with companies’ performance. This is justified by some studies in the US. And then, when the corporate governance is improved, the companies’ performance is also developed in share price or revenue. The author also points out some benefits of good corporate governance to the companies in emerging countries like India, Brazil,… These benefits affect positively to the companies’ performance. They include (Fernando, 2009):

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