Impact of Corporate Governance on Financial Performance of Companies

Question: Discuss about the Impact of Corporate Governance on Financial Performance of the Companies. Answer: Literature Review Corporate governance is the rules, regulations, practices and processes of the business organizations that direct and control different business operations of the companies. The main aim of corporate governance is to maintain a balance of the interests of the stakeholders of the companies like management of the companies, shareholders, investors, customers and others. With the help of corporate governance, the business organizations get the opportunity to obtain the competitive advantage (Eccles, Ioannou Serafeim, 2014). People over the decades have been connecting the financial performance of the business organizations with the aspect of corporate governance. In this regard, one of the major attempts is to determine the relationship between corporate governance and financial performance of the companies. Because of this, a massive amount of studies and researches have been developed to establish the relation between corporate governance and financial performance of the companies. A big amount of research papers and studies indicate that there is a positive relationship between corporate governance and financial performance of the firms. It implies that with the help of effective implementation and maintenance of corporate governance in the business operations, management can obtain good financial performance of the companies. However, many theories oppose the fact that there is a positive relationship between corporate governance and financial performance of the firms (Walls, Berrone Phan, 2012). According to these kinds of theories, the presence of effective corporate governance policies does not always lead to good financial performance of the firms. There are many instances in the companies where effective corporate governance policies of the companies failed to provide the companies with good financial performances. Thus, it can be seen that there is a contradiction about the effect of corporate governance on the financial performance of the business org anizations. There are many factors in the business organizations that help in the construction of effective corporate governance policies in the firms. The composition of board of the managing director board is considered as one such factor. It needs to be assured that the managing directors board is consisted of honest and qualified management personnel so that there is not any scope for fraud or scandals in the companies (Aebi, nSabato Schmid, 2012). Many important financial factors of the companies have positive relation with corporate governance of the companies. Some of these factors are return on the shareholders, payments of dividends, dividend yield, profitability of the companies and many others. Many accountants all over the world demand the presence of positive relationship between corporate governance and financial performance of the companies. However, there is not any concrete evidence that proves the fact that positive relationship can be seen between corporate governance and fin ancial performance of the companies. Many researchers say that companies that have strong and effective structure of corporate governance have more chances to generate good financial performance. On the other hand, the business organizations having not so strong corporate governance structure have more chances for financial failures. While considering the major accounting and financial scandals of businesses all over the world, it can be observed that the weak maintenance and implementation of corporate governance is the major cause of most of those scandals. Business organizations that have strong level of corporate governance policies enjoy certain financial advantages and they are right of the shareholders, high level of value of the firms, high level of profitability, growth in sales and others (Peni Vhmaa, 2012). Thus, it can be said that there is an urgent need for concrete evidences that will be helpful to establish the fact that there is a positive relationship between corp orate governance and financial performance of the business firms. As per the above discussion, it can be seen that the business organizations with effective corporate governance policies enjoy good financial performance, high level of return on equity, high level of return on assets, high level of return on capital and many others. In addition, companies with high level of corporate governance policies are able to employ effective risk-adjustment policies in the organizations. Companies are able to manage the accounting and financial risks with the help of effective corporate governance policies. Thus, it can be said that there are many advantages of having effective corporate governance policies employed in the business organizations (Jo Harjoto, 2012). In spite of all these facts, many accountants all over the world believe the fact that there is not any positive relationship between corporate governance and good financial performance of the business organizations. There is another group of people all over the world and they believe the fact tha t there is a negative relationship between corporate governance and financial performance of the businesses. Thus, the fact is clear that there is a deep contradiction all over the world regarding the relationship between corporate governance and financial performance of the companies. Some of the major studies all over the world suggest that positive relation can be seen between corporate governance and financial performance of the business organizations. On the other hand, another set of major studies suggest the non-presence of any positive relation between corporate governance and firms financial performance (Cheng, Ioannou Serafeim, 2014). However, based on the evidences of major accounting and financial corporate scandals, it has been seen that lack of corporate governance is the major reason behind all these corporate scandals. Hence, there is a need for more concrete evidences that will prove the presence of positive relationship between corporate governance and financial p erformance of the companies. As per the above discussion, it can be seen that many people all over the world believe that there is not any relation between corporate governance and financial performance of the companies. However, in case of the real world corporate scandals, it has been seen that ineffective corporate governance policies led to major accounting and financial scandals of the companies. For the smooth business operation of the companies, it is expected to have a well structures corporate governance policy as it has many benefits for the companies. The presence of corporate governance policies helps the organizations to improve its process of internal control. The effectiveness of corporate governance is a helpful process to enhance the effectiveness of control mechanism of the companies (Erkens, Hung Matos, 2012). On the contrary, the effective implementation of corporate governance policies will be helpful for the organizations to minimize various aspects like corporate scandals, frauds, failure s and others. In the risk minimization process of the companies, effective corporate governance policies play an importunate role as it helps to decrease the amount various business risks. Thus, from the above analysis, it can be seen that there are many advantages of corporate governance in the business organizations (Servaes Tamayo, 2013). It can be observed that all these aspects together lead the business organizations to the road of financial success. For the financial success of the companies, there are certain needs like strong and effective internal control, less amount of accounting and financial risks, the presence of strong control mechanisms and many others. For this reason, this research will be helpful to develop concrete evidences to prove the fact that there is a positive relation between corporate governance and financial performance of the firms. Research Aim To analyze and evaluate the relationship between corporate governance and financial performance of the companies is the major aim of this research. Thus, it is required to discuss various components of corporate governance. After that, another aim is to evaluate the importance of corporate governance for the financial performance of firms. These are the major aims and objectives of this research process. Research Questions According to the research aim, the following questions are developed. What are the important components of corporate governance in the business organizations? What is the relationship between corporate governance and financial performance of the companies? What are the benefits of having effective corporate governance policies for the financial performance of the firms? What are the ways to develop corporate governance in the business organizations? Research Plan The plan of this research process is discussed below: Research Philosophy: For this research, positivism research philosophy will be adopted. This philosophy will be selected as research aim is to establish the relationship between corporate governance and financial performance of the companies (Tolman, 2012). Research Approach: Between inductive and deductive research approach, deductive research approach will be selected for this research. This research will analyze and evaluate various existing theories, journal articles and research papers and thus; deductive research approach will be selected (Pearl, 2014). Data Collection and Analysis: For this research program, the researcher will collect secondary data for analysis. The sources of secondary data are various existing theories, journal articles and research papers on the same field of study. These existing theories, journal articles and research papers will be collected from authentic sources and they must be relevant in the current situation. After the collection of secondary data, they will be analyzed on in-depth-basis to get the collations. Timeline: Research Activities 1-2 2-4 4-6 6-8 8-10 10-12 12-14 Topic of the Research Setting up of Aims and Objectives Development of Research Questions Review of Literatures Development of Research Design Collection of Secondary Data Analysis of Secondary Data Findings Conclusion References Aebi, V., Sabato, G., Schmid, M. (2012). Risk management, corporate governance, and bank performance in the financial crisis.Journal of Banking Finance,36(12), 3213-3226. Cheng, B., Ioannou, I., Serafeim, G. (2014). Corporate social responsibility and access to finance.Strategic Management Journal,35(1), 1-23. Eccles, R. G., Ioannou, I., Serafeim, G. (2014). The impact of corporate sustainability on organizational processes and performance.Management Science,60(11), 2835-2857. Erkens, D. H., Hung, M., Matos, P. (2012). Corporate governance in the 20072008 financial crisis: Evidence from financial institutions worldwide.Journal of Corporate Finance,18(2), 389-411. Jo, H., Harjoto, M. A. (2012). The causal effect of corporate governance on corporate social responsibility.Journal of business ethics,106(1), 53-72. Pearl, J. (2014). The deductive approach to causal inference.Journal of Causal Inference,2(2), 115-129. Peni, E., Vhmaa, S. (2012). Did good corporate governance improve bank performance during the financial crisis?.Journal of Financial Services Research,41(1-2), 19-35. Servaes, H., Tamayo, A. (2013). The impact of corporate social responsibility on firm value: The role of customer awareness.Management Science,59(5), 1045-1061. Tolman, C. W. (Ed.). (2012).Positivism in psychology: Historical and contemporary problems. Springer Science Business Media. Walls, J. L., Berrone, P., Phan, P. H. (2012). Corporate governance and environmental performance: Is there really a link?.Strategic Management Journal,33(8), 885-913.