Benefits ofCG during a Financial Crisis

An interesting question is how CG influences firm performance in a serious financial crisis like the one in 2008. It can be argued that effective governance mechanisms strengthen a company’s ability to absorb a stock market financial crisis. In order to investigate the evolution of CG during the 2007 and 2008 financial crisis, Ezzine and Olivero (2013) constructed scores of CG before (2006) and during the crisis (2007 and 2008) for a sample of 120 Societe des Bourses Francaises firms and analyzed the influence of those practices on price volatility. Most French firms were found to have had a rather satisfactory level of compliance with OECD governance principles, and furthermore, “companies that offered higher audit process, remuneration policy, and shareholders’ rights and information scores appear to have provided greater protection to their minority shareholders” (p. 95).

Not only is there evidence that good governance correlates with increased company performance, but Saltaji (2013) reported evidence that companies have been saved from bankruptcy by adopting CG responsibility and sustainability principles during a financial crisis. In this context, findings reported by van Essen, Engelen, and Carney (2013) concerning the impact of country- and firm-level governance mechanisms in the European financial crisis are particularly interesting. These authors argued that these mechanisms challenge the universality of governance prescriptions. More specifically, van Essen, Engelen, and Carney (2013) found that governance mechanisms operate differently in crisis and noncrisis situations. There is a tendency to try to deal with a crisis by means of more stringent rules, which may have the reverse effect because it compromises the ability of executives to adopt appropriate measures in responding to systemic shocks. The same authors encouraged practitioners to optimize rather than maximize their governance options. The conclusion to be drawn from the van Essen, Engelen, and Carney study is that the efficacy of governance mechanisms in responding to a financial crisis may be a function of organizational and environmental circumstances. Thus, what constitutes “good governance” may be different in crisis and noncrisis periods. In support of van Essen, Engelen and Carney (2013), McCahery and Vermeulen (2014) maintained that CG is essential for firms to be innovative, create value, and maintain a competitive advantage, and to this end, a country’s relevant authorities should review and, where necessary, adjust existing CG systems and mechanisms. Finally, along the same lines, Dawson (2015) argued a case for governance for transformation in addition to its role for framing and minimizing risk, that it “must be designed to enable, rather than constrain, innovation” (p. 43) because firms today operate in a world of open business that impacts and frequently challenges existing organizational structures and business models.

Another benefit of CG was reported by Seamer and Psaros (2009) who investigated the role of CG in ensuring that listed companies in Australia meet their continuous disclosure obligations. They found that the likelihood of a company failing its continuous disclosure obligations (introduced in 1994) decreases as the proportion of independent directors on the board increases and if a firm segregates the roles of CEO and board chair. The same study also found that as a company’s profitability decreases, the risk of continuous disclosure failure also decreases. In total the findings of Seamer and Psaros point to a positive relationship between CG improvements and a firm’s market efficiencies.

In addition to valuing CG for its positive economic impact, empirical evidence reported by Cule and Fulton (2013) from a cross-country comparison shows that CG is correlated with national scores of well-being. The relationship identified is over and above the impact of CG on national income, indicating that people value CG for reasons beyond its economic impact.

As far as CG and the importance of employees are concerned, Young and Thyrill (2009) pointed out that the role of employees has mostly been treated as a labor issue and not as a central concern of CG. Young and Thyrill examined publicly available reports of two resource-based firms (Rio Tinto and Shell) and two finance sector firms (Westpac and ANZ Bank) in Australia to ascertain whether employees are embedded as a key component of the governance of those firms. They concluded that what is stated in the governance of those firms is not reflected in how it is operationalized. The fact remained that, in the main, those firms emphasized sustainability with reference to environmental and financial sustainability and much less workplace management and so forth. In other words, sustainability was implemented in a biased fashion.

A corporation does not exist in a vacuum but in a broad context, and the culture that is prevailing in a given country is of crucial importance. Thus let us turn our attention to public sector governance.