How to Evaluate and Measure the Effectiveness of Corporate Governance Systems?

Corporate Governance
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Mohammad Hamdan
Russian Federation

How to Evaluate and Measure the Effectiveness of Corporate Governance Systems?

There are numerous Corporate governance systems (CGS) in the world. They are complex and differ from country to country and from company to company. So how and when can we then say that a certain CGS is effective or that it isn't?
In general, there are two different views about we can evaluate CGS and measure their effectiveness:

1. CGS evaluation based on the FINANCIAL PERFORMANCE of companies
The supporters of this view of evaluating CGS adopt the fact that corporate governance mechanisms differ from one country to another, but the results are similar regardless of their structure, because all CGS aim to reduce "agency conflicts" in modern companies. Thereby reducing costs and increasing investor returns.
According to them, the effectiveness of CGS can be measured by replacing underperforming managers with more efficient ones. Replacing weak executives indicates effective external monitoring of the market on the company's performance and gives all shareholders their rights, including the minority. Conversely, the failure to replace poorly performing managers indicates ownership concentration in the hands of a few shareholders, and therefore minority shareholders will not enjoy their full rights as a reflection of the negative role that administrative ownership plays in applying corporate governance principles. All this reflects positively and negatively on the financial performance of companies. Therefore in this view the efficiency of CGS in a company can be assessed by measuring the correlation between its financial performance and its response to replacing weak managers with more efficient ones.

2. CGS evaluation based on the PERFORMANCE IN GENERAL of companies
The supporters of this view adopt the idea that CGS is evaluated through the effectiveness of corporate governance mechanisms, which is expressed in the companies' performance in general - NOT only in their financial performance. Specifically that the evaluation of the CGS should be in correlation with its goals and principles, i.e., the performance of the company should benefit both the shareholders and the stakeholders. Accordingly, increasing the effectiveness of corporate governance mechanisms will lead to better application of corporate governance principles, thereby raising the level of the CGS which is applied in the company. Thus, to determine the effectiveness of CGS, a variety of indicators are to be used to measure the effectiveness of CGS mechanisms, and then calculate the correlation between them and the company's financial performance, operational performance, and Tobin's Q.

⇨ Please share any addtional information or tips on evaluating corporate governance systems.

Durukan M.B., Serdar O., Dalkilic A.F., (2009), "The Effectiveness of the Turkish Corporate Governance System: CEO Changes and Performance Measures", SSRN.
Ganescu M. C., Gangone A. D., (2012), "A Methodology for Measuring Responsible Corporate Governance in Countries of Emerging Europe", The USV Annals of Economics and Public Administration, vol. 12, No. 2(16), pp. 129 - 139.


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