Friday, February 29, 2008

Governance matters – at last proof that doing things right means better results

It was good to read in The Guardian this week that well governed companies do perform better than badly governed ones. This proves that it is worthwhile for organisations in all sectors to listen to the advocates of better governance.

In the past doubters could always stall and ask for the proof. As one of the many reports on governance in he 1990s reported a little feebly: “Business prosperity cannot be commanded. It is important to recognise that there is no hard evidence to link success to good governance, although we believe good governance enhances the prospect.”

But no more! The researchers at the Association of British Insurers analysed 241 companies with the best and worse corporate governance records. They found that governance drives performance rather than the other way round, and found lags of two to three years in the relationship between poor governance and inferior performance. For each year a company was in the worst category for governance, its return on assets fell by about one percentage point a year.

While the study was looking at the private sector, I think it’s reasonable to apply its lessons to the public and third sectors where practice can be found to be a lot better and a lot worse than the private sector.

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