Corporate Governance Impact on Firm Performance:

Corporate governance has also been defined as "a system of law and sound approaches by which
corporations are directed and controlled focusing on the internal and external corporate structures
with the intention of monitoring the actions of management and directors.
In contemporary business corporations, the main external stakeholder groups are shareholders,
debt holders, trade creditors, suppliers, customers and communities affected by the corporation's
activities. Internal stakeholders are the board of directors, executives, and other employees.
Much of the contemporary interest in corporate governance is concerned with mitigation of the
conflicts of interests between stakeholders. Ways of mitigating or preventing these conflicts of
interests include the processes, customs, policies, laws, and institutions which have an impact on
the way a company is controlled. An important theme of governance is the nature and extent of
corporate accountability.
A related but separate thread of discussions focuses on the impact of a corporate governance
system on economic efficiency, with a strong emphasis on shareholders' welfare. In large firms
where there is a separation of ownership and management and no controlling shareholder,
the principalagent issue arises between upper-management (the "agent") which may have very
different interests, and by definition considerably more information, than shareholders (the
"principals"). The danger arises that rather than overseeing management on behalf of
shareholders, the board of directors may become insulated from shareholders and beholden to
management. This aspect is particularly present in contemporary public debates and
developments in regulatory policy. Followings are the main principles through which corporate
governance has a positive impact on firm performance.
Rights and equitable treatment of shareholders:
Organizations should respect the rights of shareholders and help shareholders to exercise those
rights. They can help shareholders exercise their rights by openly and effectively communicating
information and by encouraging shareholders to participate in general meetings.
Interests of other stakeholders:
Organizations should recognize that they have legal, contractual, social, and market driven
obligations to non-shareholder stakeholders, including employees, investors, creditors, suppliers,
local communities, customers, and policy makers.


Role and responsibilities of the board:
The board needs sufficient relevant skills and understanding to review and challenge
management performance. It also needs adequate size and appropriate levels of independence
and commitment.
Integrity and ethical behavior:
Integrity should be a fundamental requirement in choosing corporate officers and board
members. Organizations should develop a code of conduct for their directors and executives that
promotes ethical and responsible decision making.
Disclosure and transparency: Organizations should clarify and make publicly known the roles
and responsibilities of board and management to provide stakeholders with a level of
accountability. They should also implement procedures to independently verify and safeguard
the integrity of the company's financial reporting. Disclosure of material matters concerning the
organization should be timely and balanced to ensure that all investors have access to clear,
factual information.

Relationship between Corporate Governance and Firm Performance:

In respect of board structure, board size is significantly and negatively related to firm
performance, implying that, in a large size board, the diversity of insiders opinion has a negative
impact on making decisions, which is detrimental to firm performance. Nevertheless, board
independence is positively and significantly related to firm performance, suggesting that the
more independent the board is, the better firm performance would be.
On the other hand, CEO duality is negatively and significantly related to firm performance,
inferring that, under the condition that CEOs serve as executives, the board would likely fail to
be an objective supervisor, correspondingly putting firms at a disadvantage.
Boards level of experience is positively correlated with a firms performance. It is argued that
board members with a higher age average will have much more experience compared to a
younger age average. This experience is expected to positively contribute to the better
performance of a firm. However, older-age board member appears to be more aggressive and
dictatorial with decisions. These characteristics of board members may result in risky decision
making, which may undermine a firms performance.
Concerning ownership structure, insider ownership has a positive and significant relation with
firm performance, suggesting that higher insider ownership may reconcile authorities and
outside shareholders interests, consequently making firm performance better.
Independent directors will contribute positively to a firms performance.
There is a positive correlation between managements compensation and a firms performance.
Boards educational level will positively contribute to firms performance.
Global Corporate Governance:

We recognize that accepted standards of corporate governance differ between markets but we
believe that there are sufficient common threads globally to identify an overarching set of
principles. The primary objective of corporate governance activities is the protection and
enhancement of the value of clients investments in public corporations. Thus, these principles
focus on practices and structures that consider being supportive of long-term value creation. We
discuss below the principles under six key themes.
The six key themes are:
Boards and directors:
Auditors and audit-related issues
Capital structure, mergers, asset sales and other special transactions
Remuneration and benefits
Social, ethical and environmental issues
General corporate governance matters