Why is Corporate Governance Important for Organizations or Companies ?

The principal importance of this field of study lies in the fact that the interests of a large number of stakeholders are attached to a company, but only a few have an opportunity to protect their interests. The affairs of a company are often run by a group of persons who may or may not pay adequate attention to the interest of other stakeholders. For example, in Pakistan most companies are owned by families. The management of these companies is generally in the hands of a group who own more than 50% of the issued share capital and are therefore able to dominate its board of directors - and all its deliberations. If these companies are not obligated, by force of law or custom, to conduct themselves according to the principles of good corporate governance, the interests of all stakeholders and ultimately the entire economy will be adversely affected.

Good corporate governance supports capital markets. A large number of research studies have shown that companies that have better governance are able to attract more and cheaper capital both from shareholders and lenders. It has also been demonstrated in various parts of the world that there is a direct and positive link between the quality of governance of a company and its financial performance.

If companies generally observe the principles of good governance, the economy as a whole benefits tremendously. Good governance leads to better financial performance by the companies, encourages investment, fuels growth, generates employment, improves the quality and range of products, enhances governmental revenue and ultimately improves the quality of life for the general populace.