Impact of Corporate Governance on Financial Performance

Corporate governance is defined as the system of process, practices and rules through which the systematic relationship is maintained between different stakeholders namely the shareholders, management, employees etc. The development of corporate governance can be rooted back to 16th and 17th century. In case of India it was the East India Company that first initiated the process to ensure shareholders¿ right. However in India corporate governance was not considered to be important as most of the companies were small in size and owned by single family. With the liberalization and globalization Indian companies grew rapidly and the companies became huge in size and their reach also. This increase in size brought about conflict of interest between the shareholders and the management, which started affecting the decision making process and the overall performance of the firms. Therefore, corporate governance has today become one of the most important elements of business.