Introduction
Governance models and their effects on firm performance are subject to intense discussion in corporate governance. Over the past few decades, firms and scholars have studied corporate governance to understand shareholder and stakeholder models. These governance frameworks affect organizations differently. In pursuit of shareholder wealth, the shareholder model prioritizes profitability and financial advantages for stockholders. The stakeholder model recognizes the diverse interests of employees, customers, suppliers, and the community. It promotes a healthy financial-ethical balance. These governance models raise the question: “How do different corporate governance models affect firm performance?” This question underpins a diverse corporate governance research discussion that examines their effects on business operations and finances. In this literature review, we discuss these models’ complex dynamics and their impact on company performance and behavior.
Literature Review
Shareholder Model
The shareholder model, which maximizes shareholder value, is essential to corporate governance. In this model, shareholders—the company’s primary stakeholders—drive the company’s direction. This concept connects the company’s operations and choices with shareholder profits. Profit maximization, wealth creation, and financial success are promoted. The shareholder model’s impact on corporate performance has been extensively studied. Research by Şit, Ekşi, and Buyuran (2022) emphasizes the importance of corporate governance in Turkey. Their analysis shows that corporate governance significantly impacts firm performance. This setting centers on the shareholder model, which maximizes shareholder value. The research shows that governance methods boost strong performance. However, Guluma (2021) examines how corporate governance affects business performance and promotes managerial overconfidence. The shareholder model tries to increase profitability, but this study examines how managerial overconfidence might lead to poor results. It shows how focusing too much on shareholder value can hurt corporate performance. Sakawa and Watanabe (2020) examine institutional ownership and business performance under stakeholder-oriented corporate governance. This stakeholder-oriented governance research offers a practical comparative viewpoint. The findings show how the shareholder model, which prioritizes shareholder interests, affects firm performance compared to stakeholder-oriented methods.
Comparative Analysis
Comparing the shareholder and stakeholder models in corporate governance shows two paradigms that drive governance practices and goals, each with pros and cons. As previously stated, the shareholder model promotes profit maximization and shareholder value. It emphasizes shareholders’ influence on company choices and policies. This paradigm prioritizes financial governance, prioritizing profitability and prosperity (Şit et al., 2022). The stakeholder model is more holistic. It values economic viability and social responsibility for various stakeholders, including employees, customers, suppliers, and the community. This paradigm links company objectives with stakeholder interests, including environmental, social, and governance factors (Sakawa & Watanabe, 2020). The comparative analysis must examine the arguments for and against each model’s impact on business performance. Advocates of the shareholder model say its explicit focus on profitability and shareholder value maximization drives enterprises to improve operational efficiency and generate high returns. Shareholder interests benefit the firm and its stakeholders (Almashhadani, 2021). Critics say the shareholder model’s concentration on profits can lead to short-termism and disdain for sustainability. Prioritizing shareholder value may lead to ethical and social issues that hurt the organization and its stakeholders in the long run (Guluma, 2021). The stakeholder model is supported by its more significant, more inclusive governance approach that considers varied stakeholder interests. Advocates say this method fosters corporate social responsibility, sustainability, and ethical business practices, resulting in a good reputation and long-term success (Sakawa & Watanabe, 2020). Critics of the stakeholder model say its complexity may cause stakeholder conflicts, undermining a company’s focus and financial success. Overemphasizing social and environmental aims may detract from financial goals (Almashhadani, 2021).
Impact on Firm Performance
The effects of corporate governance models on firm performance have been extensively studied, revealing how governance practices affect business finances. A study by Şit et al. (2022) in Turkey studied the impact of corporate governance and audit report delays on firm performance. Their research examined corporate governance and firm performance in Turkey. This study examines governance types’ effects on company outcomes locally. Almashhadani (2021) surveyed how corporate governance boosts performance. The study examined how corporate governance affects company performance. This survey-based technique examines how governance types affect organizational performance. In 2021, Guluma examined how corporate governance parameters affect firm performance, notably executive overconfidence. The study examines how governance and managerial behavior affect corporate performance. It illuminates how individual conduct affects governance. Under stakeholder-oriented corporate governance, Sakawa and Watanabe (2020) examined institutional ownership and business performance. Their study evaluated how stakeholder-oriented governance frameworks affect corporate performance. This research helps explain how governance frameworks that prioritize various stakeholders affect corporate outcomes. The relationship between corporate governance frameworks and firm success is complex. Common themes include better financial stability, shareholder value, and ethical company behavior due to good corporate governance. However, governance model mechanisms that affect performance are debated and inconsistent. Debates generally center on the balance between short-term financial benefits and long-term sustainability, as well as managerial behavior in governance. The findings illuminated how corporate governance frameworks affect firm performance. The consensus is that governance shapes corporate outcomes, although the dynamics and contextual elements are still debated in the research.
Practical Implications and Recommendations
The research has various practical consequences for organizations and corporate decision-makers. First, organizations must realize that their corporate governance model dramatically affects their performance. Effective governance improves financial results and reputation. Therefore, understanding this is crucial. Businesses should implement governance frameworks that balance shareholder and stakeholder interests. This includes assessing shareholders’ financial well-being and their decisions’ social and environmental impacts. Companies can operate more sustainably and ethically by doing so. In governance, corporations should value transparency and accountability. Open communication with shareholders and stakeholders and honest reporting can boost company trust. To adapt to changing business contexts, governance processes, and firm performance must be evaluated regularly. Corporations should balance stakeholder interests and evaluate the practical ramifications of their governance frameworks. Businesses striving to improve performance need transparency, accountability, and governance practice reviews.
Gaps in the literature
The existing literature on corporate governance frameworks and firm performance is sound. However, future studies can resolve gaps and restrictions. Fewer studies examine the situations in which different governance models are used. Shareholder models may work differently in different businesses or countries. Future studies could examine governance models in specific sectors or economic conditions.
Furthermore, most research examines large, publicly traded corporations. Governance models’ effects on SMEs need to be better studied. Researching how governance methods affect SME performance could be fruitful. Individual governance components are often examined separately in the literature. Future research could examine how governance mechanisms synergize to affect company performance. Future research can fill these gaps and better understand how corporate governance frameworks affect company performance in different contexts and types of enterprises.
Reflection
Conducting this literature review has been a valuable learning experience. It introduced me to corporate governance frameworks and their effects on firm performance. Throughout the process, I gained abilities to help me as a finance manager. The literature review taught me investigation and critical analysis first. They taught me to find relevant scholarly sources, assess their credibility, and extract useful information. For my career aim, these abilities are critical for keeping up with finance and corporate governance advancements. This review also improved my information synthesis and presentation. Writing a narrative from complex study data was challenging yet gratifying. For a finance manager, excellent communication and presentation of financial facts are essential, and this experience has improved my skills. Corporate governance frameworks are significant to my career aspirations. As [INSERT CAREER GOAL], I will make financial decisions that affect my employers’ performance and sustainability. Making strategic financial decisions requires understanding governance structures and their effects on corporate performance. I learned corporate governance frameworks and developed research and analytical abilities via this literature review. My future profession as a finance manager requires being informed and making data-driven decisions. These skills and insights are helpful.
Conclusion
In conclusion, the literature review on corporate governance models and their effect on firm performance gives essential knowledge into the dynamics of corporate decision-making and financial outcomes. The research question, “How do different corporate governance models influence firm performance?” prompted an extensive examination of shareholder and stakeholder models, their related arguments, and exact evidence from the literature. The findings underscore that the effect of corporate governance models on firm performance is not uniform. The shareholder model, primarily centered on amplifying shareholder value, can yield short-term financial gains yet may likewise encourage shortsightedness and unethical practices. In contrast, the stakeholder model, which considers a broader range of interests, will, in general, promote long-term manageability and ethical behavior. The ongoing debate encompassing these models underscores their significance in corporate governance. Understanding the impact of corporate governance models is essential in the present business environment. It underscores the significance of responsible and ethical corporate decision-making that considers not just shareholders but all stakeholders. As businesses face increasing scrutiny and the demand for maintainability develops, making informed decisions about governance models is paramount for making long-term progress and contributing to a more ethical and sustainable global economy.
References
Almashhadani, M. (2021). How Does Corporate Governance Leverage Organizational Performance: A Survey with Suggestions and Notes for Further Research. RJOAS, 3(111), March 2021. https://doi.org/10.18551/rjoas.2021-03.01
Guluma, T. F. (2021). The Impact of Corporate Governance Measures on Firm Performance: The Influences of Managerial Overconfidence. Future Business Journal, 7, Article number: 50. https://doi.org/10.1186/s43093-021-00093-6
Sakawa, H., & Watanabe, N. (2020). Institutional Ownership and Firm Performance under Stakeholder-Oriented Corporate Governance. Sustainability, 12(3), 1021. https://doi.org/10.3390/su12031021
Şit, A., Ekşi, İ. H., & Buyuran, B. (2022). How Important is Corporate Governance Features and the Lags on Audit Reports in Firm Performance: The Case of Turkey. Journal of, 17(1), 218-237. https://doi.org/10.2478/sbe-2022-0015
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