How Corporate Governance Affects the Financial Performance of Companies

Corporate Governance
Knowledge Center


Best Practices
Sarah Daghman
Lecturer, Russian Federation

How Corporate Governance Affects the Financial Performance of Companies

Corporate governance affects the financial performance of companies through several channels, the most important of which are:
1. Expanding access to external financing sources. Effective application of corporate governance principles leads to facilitating access to capital markets and increasing the credit rating of the company by eliminating the two most important barriers to accessing external finance (the inconsistency of information between financiers and borrowers due to poor accounting; non-discloser of the important information and neglecting interested parties associated with the company). Companies with an effective corporate governance system can increase investor confidence and increase the firms' access to capital, therefore improve their financial performance.
2. Increasing the company's value. Investors usually pay higher prices for purchasing company shares that have effective adherence to corporate governance principles, since it protects their rights, especially the rights of small investors, not to mention ensuring good regulation of relations between investors, the board of directors and managers. This leads to a decrease in the cost of capital.

Effective corporate governance systems also provides direct economic benefits to companies, which makes them more profitable and competitive.
3. Crisis reduction. Weak investor protection makes net cash flows more sensitive to events with a negative impact. As investor risks increase, the cost of capital increases accordingly. Therefore, investors, as a rule, follow corporate governance principles as key criteria in the process of making investment decisions, as they reduce the risk of crises and (to some extent) maintain the financial performance of the company even in times of crisis.
4. Improving stakeholder relationships. When the relations between stakeholders are clear, based on transparency and each stakeholder fulfills his obligations, this will inevitably lead to company improvement, maximizing the wealth of shareholders, improving their activities, as well as a good economic impact on the community in which the company operates.
5. Improving administrative efficiency. An effective system of corporate governance provides the necessary incentives for the board and management to achieve goals that meet the interests of the company and its shareholders. Thus, board members and managers are constantly stimulating work in the interests of the company, which has a positive effect on its financial performance.

Igor Todorović (2013. Impact of corporate governance on performance of companies, Montenegrin Journal of Economics, Vol. 9, No. 2, pp. 47-53.
The Organization for Economic Cooperation and Development, Practical Guide to Corporate Governance, 2009.


Reinaldo Schumann
Entrepreneur, Brazil

Main Corporate Governance Function

Perfect! The main function of the entire Corporate Governance process is to pay for itself by clearl... Sign up

Jaap de Jonge
Editor, Netherlands

3 Main Functions of Corporate Governance

Actually Corporate Governance has 3 functions (see the main article on Corporate Governance): - For... Sign up

Manoj Rambajan (MBA)

Corporate Governance Should not Focus Solely on Financial Performance

Despite that fact that Corporate Governance is the modern norm in business administration, yet many ... Sign up


More on Corporate Governance:
Discussion Topics
🥇 Internal and External Corporate Governance
Agency Theory: Principal-Agent Problems
🥈 Corporate Governance: One-tier versus Two-tier Boards
🥉 Dealing with non-profit Board of Directors
🔥 CEO Duality
Europe Reaches Agreement on Banking Supervisor: Curse or Blessing?
Corporate Culture Vis-a-vis Societal Culture
HR Involvement in CG
How to Evaluate and Measure the Effectiveness of Corporate Governance Systems?
Corporate Governance and Strategy
Corporate Governance in Family Businesses
Governance in Public Sector Organisations
👀How Corporate Governance Affects the Financial Performance of Companies
Challenges in Corporate Governance in Africa
Why the Interest in Corporate Governance Today?
Corporate Governance Aims
Culture and Corporate Governance
Gender Diversity (Women) in the Board of Directors
A Global Corporate Governance Body is Needed
Corporate Governance Rules and Ethics
Why Should a Firm have Procedures and Policies?
Governance versus Management
Maintaining Creativity and Flexibility Despite of Corporate Governance Mechanisms
Corporate Governance and Compliance
Special Interest Group

Do you know a lot about Corporate Governance? Become our SIG Leader

Corporate Governance
Knowledge Center

About 12manage | Advertising | Link to us / Cite us | Privacy | Suggestions | Terms of Service
2023 12manage - The Executive Fast Track. V16.1 - Last updated: 29-5-2023. All names of their owners.