Board Governance and Its Impact on Performance

According to the agency paradigm, board governance, balanced in composition and structure, actually performing their functions, contributes to more efficient work of the company.

The Variety of Board Governance and Its Main Functions

The board governance develops the company’s strategy, therefore, the financial result of the company’s activities depends on the quality of the decisions it makes. Although it seems oversimplified, this definition provides an understanding of the nature of corporate governance and the crucial role of leaders in an organization in establishing effective corporate governance practices. In most companies, such leaders are directors who determine the long-term strategy of the company to fulfill the interests of owners (members or shareholders) or, more broadly, all stakeholders: customers, suppliers, creditors, regulators, and society as a whole. It is a kind of corporate governance tool that helps to mitigate disagreements between stakeholders.

In the current literature, there are three competing models of how board governance functions:

  • Firstly, it is the “textbook ideal” – how a board of directors should be structured in theory. While we all understand that the ideal is unattainable, such a model is needed as a point of reference; in addition, we would like to think that existing boards of directors are not deviating too much from the ideal.
  • Secondly, it is a model that can be called the “pessimist view”. The point is that boards of directors are just a screen since board members are appointed and controlled by management.
  • Thirdly, this is the “friendly council” model, in which board members want to honestly fulfill their duty to shareholders, but that is why they cannot go into conflict with management, since their ability to do their job is determined by the information they can get. only by having a relationship of trust with the executive leadership.

The Impact of Board Governance on Performance

It is important to realize that effective corporate governance to some extent implies compliance with the law, but even full compliance does not in itself mean that a company is properly adhering to all corporate governance norms. Suffice it to say that the Cadbury report was released in the UK shortly after the collapse of a major publishing group, Maxwell Communications plc. Many of the actions that led this company to collapse were legitimate at the time, such as concentrating power in the hands of one person or borrowing from their own retirement fund to accelerate growth.

Ensuring compliance of the corporate governance system with the following principles:

  • compliance with the scale and nature of the activities, its structure, risk profile, business model;
  • protecting the rights of shareholders and supporting the implementation of these rights;
  • ensuring timely and reliable disclosure of information;
  • to fulfill their duties, members of the board of directors have access to complete, relevant, and timely information.

Firstly, these procedures are time-consuming and inaccessible to external investors in the corporation. Monitoring systems for assessing the effectiveness of corporate governance do not allow specifying the economic parameters of the company’s activities and do not take into account the influence of owners on its activities.  Secondly, the performance of corporate governance mechanisms is much easier to measure. Although the goals are similar – the work of the CEO in the interests of shareholders and the work of the executive branch in the interests of voters – in a corporation, the criteria for success can be quantified (first of all, this is the market capitalization of the company).

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