Does good governance result in improved firm performance?- some directions for future research.

Does good governance result in improved firm performance?

- some directions for future research.

SANTOSH PANDE
ITM University &
Thought Arbitrage Research Institute.

Presented at the 3rd International Conference on Corporate Governance.
Shriram College of Commerce, New Delhi,.
27th March 2012.

Corporate Governance –a definition
Corporate Governance has been defined as;

“… how to assure financiers that they get a
return on their investment”.
Shleifer, Andrei and Vishny, Robert W., (1997); A Survey of Corporate Governance,
The Journal of Finance, Volume 52, Number 2 (June 1997).

Traditionally deals with the agency problem

Does good governance result in improved firm performance? some directions for future research.

Why focus on good governance?
The movement towards good corporate governance has
been motivated by the presumed existence of the following
intuitive linkages;

•Good corporate governance would protect the interest of
the owners (shareholders) and harmonize the interests of the
owners and managers

•Good corporate governance would result in better
organizational performance and make it easy for firms to
access external funds and investors ,


Relationship between Governance and Performance

Good Governance has been the focus of research
by Consultants, Fund Managers, Rating
Agencies, Donor organizations.
Some Key Studies:
– Coombes, Paul and Watson, Mark, (2000); Three Surveys on Corporate
Governance, The McKinsey Quarterly, 2000, No. 4.
– Beyond the Numbers-Corporate Governance: Implication for Investors;
Deutsche Bank –submitted by Deutsche Bank A.G., in 2004 to the Asset
Management Working Group (AMWG) of the United Nations Environment
Program Finance Initiative (UNEP FI).
– ICRA CORPORATE GOVERNANCE SURVEY, February 2004
– CORPORATE GOVERNANCE IN ASIA, Recent Evidence from
Indonesia, Republic of Korea, Malaysia, and Thailand –an ADB Report


Governance and Performance..contd.

• The broad conclusion of the survey based
research efforts have been near unanimous –
Good Governance pays!

• To put these findings into perspective, reforming
the Corporate Governance practices by a Firm
could significantly improve its valuation at
considerably lesser effort than that required to
boost sales, cost cutting exercise or improving
margins!


Governance and Performance – Empirical Research

Key Studies:
• Gompers, Paul A., Ishii, Joy L. and Metrick, Andrew;Corporate Governance &
Equity Prices
• Lucian Bebchuk, Alma Cohen, and Allen Ferrel ;
What Matters in Corporate Governance?
• Lawrence D. Brown and Marcus L. Caylor; Corporate Governance and Firm
Performance
• Kenneth Lehn, Sukesh Patro, and Mengxin Zha; Governance Indexes and Valuation:
Which causes Which?
• David Larcker, Scott Richardson, and Irem Tuna; How Important is Corporate
Governance?
• Carol Padgett & Amama Shabbi; The UK Code of Corporate Governance: Link
between Compliance and Firm Performance
• Balasubramanian, N., Black, Bernard S., and Khanna, Vikramaidtya,; Firm Level
Corporate Governance in Emerging Markets – A case study of India


Conclusions from Empirical Research

Despite the intuitive appeal of the proposition that
‘Good Governance (of the Firm) would lead to Good
Performance (by the Firm)’ conclusive evidence
linking good governance to good performance has
been lacking with the results obtained from empirical
research, to date, having been mixed.
…………………yet, country after country has gone in for
governance reforms including introducing ‘model’
codes for good governance in the belief that good
governance would lead to good performance!


Basis for a robust Governance Policy

Effectiveness of corporate governance regulations (in bringing about good
performance) depends on the answers to the following questions;

– Are the regulatory changes in corporate governance based on sound theory
or are they based on popular perceptions and a common position that is
arrived at based on the negotiation of the divergent views of various interest
groups who are affected by the regulatory changes?
– How robust is the underlying theory of CG, in particular, the linkage of good
governance to good performance?
– Does the CG Theory comprehensively model all the factors that impact
corporate governance and accounts for differences in contextual and cultural
factors that could impact governance.
– Has the CG Theory been tested, empirically, on actual conditions and have
the conclusions been tested for their validity?


Key Challenges in C G research
• The first challenge of defining and measuring corporate
governance in a manner that it captures its essence –
assessment of good governance requires measuring ‘soft
issues’!

• The second challenge in establishing a universal standard of
good corporate governance and to examine if it is indeed
possible to develop such a standard - can a policy of ‘one size
fits all’ hold for good governance?

• The third challenge of establishing causality from empirical
data - have researchers who have inferred causality between
corporate governance and corporate performance drawn
conclusions which are beyond the empirical evidence?


Directions for future research
ONE- CG Research needs to develop a more complete
understanding of the corporate governance model in the
following areas;
– A better understanding of the various underlying factors that
affect corporate governance in an organization.
– There is a need to better understand the external factors that
impact corporate governance .
…….. taking a ‘one size fits all’ approach to corporate
governance ( as is done in most of current research) fails to
recognize the impact of important contextual factors that
make each organization unique and because of which
individual corporate governance solutions may have to be
crafted for each organizations.


Directions for future research..contd.
TWO- CG Research needs to grow beyond merely studying
the impact of simplistic, structural factors like board attributes
or shareholder rights on organizational performance

……….. and should be able to account for
systemic and multi dimensional influences on
corporate performance which are related to
the organization’s strategy.


THREE - CG Research has to be based on
developing more robust econometric models
to study corporate governance
………………….. models need to be based on a
more comprehensive understanding of the
theory as studies based on an incomplete or
partial understanding of the theory are likely
to give misleading results.



FOUR – Models for CG Research should take
into account the basic differences that exist
between organizations that are characterized
by the ‘insider’ model of management as
opposed to organizations that are
characterized by the ‘outsider’ model of
management.


FIVE – CG Research need to go beyond a ‘tick in
the box’ approach while studying corporate
governance.
…….. need for greater use of qualitative
research methods, including observing boards
in real time and interviewing directors – for
advancing research in this field …..how do you
assess the ‘quality’ of decisions of the Board
of Directors? or Board ‘Effectiveness’?


SIX – A serious lacuna in existing C G research is the
absence of an encompassing and unifying theory
of corporate governance; the existing frameworks
do not hold anymore.
………..we need new theoretical insights that will
take us towards a comprehensive theory of
governance - one such model is based on the
concept of maximizing the long term strategic
value for an organization.


SUMMARIZING

Despite causality between good governance and
good performance not being established it should
not be implied that such a causal relationship
does not exist!
All it means is that existing corporate governance
research has not been able to identify such a
causal relationship….
…… and points to the need for more detailed and
in-depth research in this field!!


In the absence of robust CG Research…
“It would augur well if the Indian corporate governance
debate were to transcend beyond conventional wisdom
to take into account the distinctive factors that are
characteristic to the agency problems between
controlling shareholders and minority
shareholders, rather than to continue to operate under
concepts that relate to the agency problems between
shareholders and managers that are inappropriate to
Indian corporate law and governance ”.
• ………..Umakanth Varottil, A CAUTIONARY TALE OF THE TRANSPLANT
EFFECT ON INDIAN CORPORATE GOVERNANCE , electronic copy available at:
http://ssrn.com/abstract=1331581.


In the absence of robust CG Research...
“It becomes clear that even with attentive
crafting of detailed governance rules by a
group of elites with a deep understanding of
corporate governance standards around the
world, the reform process is useless if an
effective infrastructure for enforcement and
implementation is not in place”.

………………Afra Afsharipour; THE PROMISE AND CHALLENGES OF INDIA’S
CORPORATE GOVERNANCE REFORMS; electronic copy available at:
http://ssrn.com/abstract=1640249


Further…….
• To access a full length paper on this subject
and other Corporate Governance
issues, please visit my author’s page on the
Social Science Research Network (SSRN)
website at:
http://ssrn.com/author=1714442
• Comments and feedback most
welcome, please write to me at;
spande@nihilent.com

DISCUSSIONS & QUESTIONS!

THANK YOU


Does good governance result in improved firm performance?- some directions for future research.

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