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Relationship between Corporate Governance and Firm Performance

According to a 2002 survey by McKinsey & Company, nearly 80 percent of institutional investors responded that they would pay a premium for a well-governed company. The size of the premium varied by market, ranging from 11 percent for a company in Canada to around 40 percent for a company in Morocco, Egypt, or Russia (see Figure 1.5).35 These results imply that investors perceive well-governed companies to be better investments than poorly governed companies.36 They are also consistent with the idea that governance systems are more important in certain countries than in others.

Figure 1.5

Figure 1.5 Indicated premiums for good corporate governance, by country.

Source: Paul Coombes and Mark Watson (2002). “Global Investor Opinion Survey 2002: Key Findings.” McKinsey & Company.

As we will see throughout this book, many studies link measures of corporate governance with firm operating and stock price performance. Perhaps the most widely cited study was done by Gompers, Ishii, and Metrick (2003).37 They found that companies that employ "shareholder-friendly" governance features significantly outperform companies that employ "shareholder unfriendly" governance features. This is an important research study, but as we will see in Chapter 13, these results are not completely definitive. Currently, researchers have not produced a reliable litmus test that measures overall governance quality.

The purpose of this book is to provide the basis for constructive debate among executives, directors, investors, regulators, and other constituents that have an important stake in the success of corporations. This book focuses on corporate governance from an organizational instead of purely legal perspective, with an emphasis on exploring the relationships between control mechanisms and their impact on mitigating agency costs and improving shareholder and stakeholder outcomes.

Each chapter examines a specific component of corporate governance and summarizes what is known and what remains unknown about the topic. We have taken an agnostic approach, with no agenda other than to "get the story straight." In each chapter, we provide an overview of the specific topic, a synthesis of the relevant research, and concrete examples that illustrate key points.38 Sometimes the evidence is inconclusive (see the following sidebar). We hope that the combination of materials will help you arrive at intelligent insights. In particular, we hope to benefit the individuals who participate in corporate governance processes so that they can make informed decisions that benefit the organizations they serve.

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