Corporate Governance and Financial Performance Link FAQ
In brief: Companies pay to have directors, who are required or expected to follow mandated or recommended governance standards while also serving as guardians of long-term corporate performance. But do directors and boards actually add value? And if so, how?
This fact sheet can help directors to balance the goals of good governance and corporate performance by understanding their linkage. Directors will learn what empirical research says about the link between governance and performance, and can use this information to ask nuanced questions about the financial impact of proposed governance changes, push back against governance proposals that are not likely to lead to better financial performance, and support proposals that are likely to foster better financial performance.
Most relevant audiences: board chairs, nominating/governance committee chairs and members, CEOs, and chief financial officers
NOTE: Studies on the impact of diversity on financial performance are likely to increase in future years as more organizations engage in diversity initiatives. On August 7, 2021, US Securities and Exchange Commission chair Gary Gensler announced approval of a new Nasdaq listing Rule 5605 (f) requiring disclosure of board diversity and offering recruitment help. As described in this regulatory release, the new rule will require Nasdaq-listed companies (with some exceptions) to disclose information on certain self-identified characteristics of the company’s directors. Under the rule, each Nasdaq-listed company must have (or explain why it does not have), at least two members of its board of directors who are diverse, including at least one director who self-identifies as female, and at least one director who self-identifies as an underrepresented minority or LGBTQ+—all terms defined in the rule. In footnotes 119-125, the release cites several studies of the impact of diversity on financial performance. Nasdaq will not publish its own study on this topic, but states that “the greater benefit of publicly disclosing board diversity data would be that all interested parties can adequately conduct their own analyses of the impact of the proposal on board diversity and its relationship with company performance," and adds that Nasdaq "welcomes these analyses.”