Does Good Governance Pay? Evidence from Around the Globe

Abstract:     
Despite the very strong intuitive and instinctive belief in the principle that 'good governance leads to improved firm performance' and a number of opinion surveys re-affirming the confidence of investors in good governance there has been no conclusive evidence, based on empirical research, confirming the causality of this relationship.

This paper reviews the status of corporate governance research across the globe and identifies three serious challenges that are faced by researchers in this field - given that governance is a soft issue that is not best captured by quantitative and structural factors alone, the first major challenge is to define the correct measure(s) for good governance that would capture all the facets of governance. The second major challenge in corporate governance research has been the fact that the focus of most such research efforts has been to evolve a universal standard for governance that all organizations must strive for and the related attempts, by researchers, to measure governance in organizations against this universal standard. Adopting such an approach of 'one size fits all' to corporate governance research has been self limiting and inappropriate. The third significant challenge to corporate governance research is the inference of causality, between good governance and good performance, which has been made in many research studies and which, more often than not, is based either on flawed methodology or an incomplete modeling of the various factors that underlie corporate governance. There is a need for greater theoretical development in this area that would lead to developing more holistic and robust models for corporate governance in organizations as well as developing more robust econometric models for analyzing data. Also, given that the quality of corporate governance involves many soft factors which, most of the times, are not amenable to quantitative measurement it would be worthwhile to undertake greater qualitative research in this area so as to understand the various factors that affect corporate governance and establish causality between corporate governance and corporate performance.

Notwithstanding the fact that conclusive evidence has yet not been obtained that establishes causality between good governance and good performance, it does not imply that such a causal relationship does not exist; all it means is that corporate governance research so far has not been able to identify such a relationship and points to the need for more detailed and in-depth research in this field.

This paper identifies the direction for such future research which should become the basis for guiding the next generation of effective corporate governance reforms.

This paper is work-in-process and the author invites comments and viewpoints from other fellow researchers interested in this field.

Number of Pages in PDF File: 31

Keywords: Corporate Governance, Corporate Performance, Causality, Governance Research

working papers series