Study links good governance to performance

The article "Study links good governance to performance" researched whether good governance is an indication of whether the company is sound or not. The research revealed a striking resemblance of companies with strong shareholder values vs. those without much shareholder values. The study looked at 1,500 large companies from 1990 to 1999 and found that those with stronger shareholders' rights produced returns 8.5 percent better than companies with more dictatorial management structures.

What does this information mean? First of all, shareholders are the owners of the company. The CEO is responsible for providing a return on investment to their shareholders. Ultimately, shareholders want to be paid dividends or have the value of the stock rise. Investors these days are investing in stocks in the short term, which means that dividends are less important, and relying on the value of the stock to rise in order to make money. This is the classic example of buying low and selling high. If a company tries to hide information from shareholders, or acts in their own interest, then the return for the investors will be minimal. If this is the case, it could ultimately hurt investors, consumers and the employees of the organization. Just to show an example is companies such as Enron, WorldCom, Tyco, and others you hear in the news today.

1 comment:

Dr. Tufte said...

This shouldn't be a surprise. Good corporate governance and solid shareholder rights are ways of addressing the principal-agent problem. A company that addresses that ought to have higher rate or return because they are doing something desirable to potential buyers of their stock.