Saturday, May 10, 2014

Does Corporate Governance Create an Impact over Business Performance?

A steer may not accelerate the speed of vehicle directly; by navigating the better path, it can shorten the distance or save the energy to reach the right destination


Governance is like steer-wheel (governance is "steer" in Greece), to ensure organizations running in the right direction and well head to the destination. A governance system ensures individual decisions and behaviors comply with collective values and objectives. The point is: Does corporate governance create an impact on business performance?

Governance behavior: Corporate governance does influence organizational performance. However, the governance structure can’t impact performance directly; it must be through the governance behavior, more often, it is indirect, it is through the executives of the organization that a board is able to influence the organizational performance. That is, the way a board influences organizational performance is via their interactions with the executive (executive is defined as those business leaders/managers who have regular social or formal contact with the board and directors). 

The impact is situational: Corporate governance definitely creates an impact on business performance. This impact is, however, situational. Business performance can be affected by numerous factors of which governance is one of them. Ultimately, the board takes the praise or the blame depending largely on their ability to influence the business outcomes. Hence, a further important aspect of behavioral governance is the propensity and ability of the board to work cognitively. After all, the work of a board requires strong cognitive abilities in order to perform their directorial duties. Just like a steering wheel can’t accelerate the speed of the vehicle, but by navigating the better pathway, it may shorten the distance or save the energy to reach the destination. 

The rules and principles: Governance and risk management are important, but should be handled and prioritized in such a manner that they're inherent in the way without negatively impact the working flexibility to deliver solutions, and to ensure clear and concise information to key decision makers. Therefore, the governance rules include, but not limited to improving the functioning and transparency of the company, its business strategy, and management performance. The main benefit is, therefore, the understanding of the processes and adjusting them for better functioning of the production or service processes of the business entity. 

Best practices: The positives impacts come from corporate governance good practices on the business performance. Start with a balance among the shareholders and investors. For all companies, the definition of the roles, and drivers to the board and committees are essential to lead and to maintain a productive relationship with the executives. The point is how to effectively influence, and corporate governance has a direct link to each business and their processes. Not only from the financial results, but also from the involvement and signs being displayed inside the organization, about what guidance, values, and principles governing the company's commercial act. 

Identify gaps: Corporate governance indicates the relationship with the Board, shareholders, management and the stakeholders. If all these would perform to the vision and mission of the organization, it would increase the performance. However, many of the questionnaires or models are based on structural aspects of governance, or they are a checklist of board member qualifications, but the effort should be put more into identifying gaps in governance processes and jointly with the management develop improvement initiatives.

Corporate governance has a great impact on corporate performance. Good governance must create good performance, especially for the long run business growth. The companies which have good performance must have good governance structure and behavior as well.



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