Volume 10, 1999
Proceedings of the Tenth Annual Meeting
Sandra A. Waddock, Samuel B. Graves
Assessing the Link Between Corporate Governance and Social/Financial Performance
Well-governed companies should generate not only stronger financial performance than poorly governed ones, but also better overall corporate social performance (CSP), as well as treatment of their primary stakeholders. Using Business Week's "best and worst" governed companies for 1996 and 1997 we find significant and positive associations between governance quality and overall CSP. In addition, we find significant and positive association for community relations for the year 1997, and employee relations and diversity management for both years. Strongly positive relationships are also found for financial measures including return on equity, return on assets, and return on sales. The market measure, ten-year total relative return to shareholders, is also strongly positively associated with quality of governance. Overall, not only do better-governed companies perform better with respect to several important stakeholders, but they also outperform less well governed companies financially and therefore can.be assumed to be "treating" their owners better as well.