Friday, January 3, 2014

The Correlation between Corporate Governance and Business Performance

The High Business Performance Comes through Good Governance Behavior, not Structure Only. 

Based on Wikipedia, “Corporate governance refers to the system by which corporations are directed and controlled. …Governance provides the structure through which corporations set and pursue their objectives while reflecting the context of the social, regulatory and market environment.”. There’s hot governance debate continuous on –Does corporate governance create an impact on business performance?

Good governance can create good performance, especially in the long run. This is because that good corporate governance creates good decision-making system and good controlling system, which can assure the corporations’ operation under the correct directions and behaviors correctly. And corporate governance has a direct link to each business and its 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 activities. 

Corporate governance has a great impact on corporate performance, not through governance structure directly, but through good governance behavior. The governance structure specifies the distribution of rights and responsibilities among different participants in the corporation (such as the board of directors, managers, shareholders, creditors, auditors, regulators, and other stakeholders) and specifies the rules and procedures for making decisions in corporate affairs. But the governance structure can’t impact performance directly; it must be through the governance behavior. The companies which have good performance must have good governance structure and behavior as well.

Improve governance mechanism can improve the quality of performance, corporate governance should directly link to the performance of both public and private organizations. Governance is a mechanism for monitoring the actions, policies, and decisions of corporations. Therefore, look for the linkage between operation management and governance rather than compliance, corruption, and tough issues, improve the quality of performance through governance improvement.

The point is how to effectively influence business performance. The Corporate Governance rules and principles need to be followed to improve 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. However, many of the governance 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 improvement initiatives.  

Start with a balance among the shareholders and investors. Governance involves the alignment of interests among the stakeholders. Corporate governance indicates a relationship with the Board, shareholders, management and the stakeholders. If all these parties would perform to the vision and mission of the organization, it would increase the performance. There are positives impacts from corporate governance good practices on business performance. 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

Ultimately, the board takes the praise or the blame depending largely on their ability to influence the business outcomes. Board is one of the most crucial governance bodies in the modern enterprise. Behavioral governance explains how the characteristics of the board influence the executive who in turn impact organizational performance. 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.

Business performance can be affected by numerous factors of which governance is one of them. Obviously the issue is not simple and certainly, there is a consensus that governance not only should but must influence to manage the level of performance of all the members of the company. Absolutely, there’s a correlation between corporate governance and business performance, and there's a clear connection between bad governance and poor performance, good governance practices can improve business maturity, and high mature businesses usually have much better performance and longer life span than average businesses.


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