Corporate Governance and Development: An Update

Abstract

This paper reviews the relationships between corporate governance and economic development and well-being. It finds that better-governed corporate frameworks benefit firms through greater access to financing, lower cost of capital, better firm performance, and more favorable treatment of all stakeholders. Numerous studies agree that these channels operate not only at the firm level, but also in sectors and countries - with corporate governance being the cause. There is also evidence that when a country’s overall corporate governance and property rights systems are weak, voluntary and market corporate governance mechanisms have more limited effectiveness. Importantly, the dynamic aspects of corporate governance - that is, how corporate governance regimes change over time and what the impacts of these changes are - are receiving more attention. Less evidence is available on the direct links between corporate governance and social outcomes, including poverty and environmental performance. There are also some specific corporate governance issues in various regions and countries that have not yet been analyzed in detail. In particular, the special corporate governance issues of banks, family-owned firms, and state-owned firms are not well understood; neither are the nature and determinants of public and private enforcement. Consequently, this paper concludes by identifying major policy and research issues that require further study.