HOW HAS THE FINANCING AND GOVERNANCE OF

FIRMS DETERMINED THE LONG-TERM PERFORMANCE

AND STABILITY OF LEADING ECONOMIES?
 Table of Contents
Introduction................................................................................................................................3

Corporate Governance and Financing of firms..........................................................................3

Role of Corporate Governance and Financing of firms in determining the stability and
economic performance of leading economies............................................................................4

Conclusion..................................................................................................................................9

References................................................................................................................................10

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Introduction

Corporate governance and business finance are two of the most important aspects for the
survival and growth of every business. Growth of every business also leads a nation’s
economy to witness stability and long-term performance improvement. As companies
operating in an economy provide a significant contribution to the country’s economic growth,
corporate governance and business finance can be observed as key determinant of a nation’s
economic stability. Rising from the ground cemented by this context, this study focuses on
analysing the influence of governing and financing firms in determining stability and long-
term performance of leading economies like the UK, USA, and Germany.

Corporate Governance and Financing of firms

Corporate governance is known as the system through which business organisations in an

economy are directed and controlled (Clarke, 2007). From the perspective of a business, the
responsible entity for the governance of a company is the Board of Directors who sets
strategic directions for the entire organisation to follow. On the other hand, the government
officials or authorities who are shouldered the responsibility to direct all companies within
the national economy are responsible entities for corporate governance. In a broad sense, a
study by Inagami and Whittaker (2005) has affirmed that the primary concern of corporate
governance is associated with creating and holding a balance between social and economic
goals of a nation or business and between communal and individual goals. The framework
applied for government of companies focuses on encouraging and allowing companies to
make efficient uses of resources, while requiring each responsible entity making use of the
country’s resources to take full accountability for the stewards of those resources. This
approach of a corporate governance framework ensures such balances alongside bringing
stability to economic growth and long-term performances.
The corporate governance system of a country plays a crucial role in reducing or overcoming
conflict of interest that may exist in a particular organisation and thus reducing the agency
costs (Almashhadani and Almashhadani, 2022). In this regard, shareholders establishing a
company are the sole responsible persons for determining the system of corporate governance
while creating the optimal direction for their corporations. There are basically two traditional
systems of corporate governance. The first one is the “one-tier system of corporate
governance” that is applied to businesses in Anglo-Saxon countries where the majority of

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organisations disperse the shareholders’ structure (Khan and Nosheen, 2020). On the other
hand, the “two-tier system of corporate governance” is used in Continental-European
countries where shareholders’ structure is generally concentrated. Countries can choose any
system of corporate governance, which should be conferred upon organisational founders.
Both tiers provide a skeleton for a particular business in terms of regulating the company and
determining on how the company should be governed under the involvement of board of
directors and supervisory board. However, companies should consider the system of
corporate governance that will appropriately help them to deal with those conflicts of
interests that may pose threats to the organisation’s best interests.
In the case of business financing, it is typically a process of offering companies the funds
required for financially performing various business activities. Along with the government,
key institutions such as banks or investment companies tops the list of finance providers for
organisations in any country. A study by Mian and Sufi (2018) has pointed out that business
finance is the cornerstone of every organisation, as finance is needed for purchasing
resources, equipment, and essential support required by a business to perform all other
economic business activities. In a broader sense, business finance involves activities that are
concerned with the capital funds acquisition and conversion to meet financial needs and
objectives of a firm operating within an economy. Maximisation of shareholders’ wealth,
ensuring constant money availability to perform economic activities in a business, attainment
of optimal capital structure, and effective utilisation of funds are the key values associated
with business finance (Bottiglia et al. 2010). Business financing at the time of economic
recessions or financial distress of business allows organisations to ensure financial backup for
the business and perform activities without experiencing any money-related obstacles.

Role of Corporate Governance and Financing of firms in determining the

stability and economic performance of leading economies

Influence of corporate governance of firms on determining leading economies’ stability

and long-term performance
Application of best corporate governance practices results in improving performances of a
firm, which in turn leads to better stability and performance of a country’s economy. In order
to point out the reason for such a claim, the work by Ciftci et al. (2019) has mentioned that a
well-established corporate governance framework allows organisations to make more
efficient utilisation of resources alongside providing better access both not only to capital but

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also to higher quality employment opportunities with which firms can grow in the most
sustained and robust way within the country’s economy. As per the International Finance
Corporation (2022), good corporate governance focuses on facilitation of improved access for
companies to capital (including debt and equity capital) that consequently offers long-term
competitiveness for organisations. Therefore, companies that actively promote good
corporate governance practices by applying the highest standards of governance, in
compliance with instructions of their respective country- or state-level governments, are
found to attract more investors who are interested in providing financial capital at a lower
cost.
On the other hand, good performances of firms within an economy acts as a key detrimental
factor for the improvement as well as stability of the operating nation’s economy. In order to
elaborate on this point of view, this study makes some assumptions with regard to the
influence of good governance of firms on a nation's economy. Such assumptions mainly lie in
aspects like easier capital access and reduction of agency costs.
Easier capital access
Investors are found to be attracted more to firms of countries that apply good corporate
governance systems and practices than to countries and firms that work under a rigid or
ineffective corporate governance system. Here, a good corporate governance system or
practice is based on principles like fairness, efficiency, and accountability, in the
management of firms as well as transparency including accuracy and completeness of
information at all levels (Aspan, 2017). As per the perception of investors, investing in firms
under a better governance framework means better utilisation of resources in their best
interests and minimisation of risk channelization to private portfolios. Therefore, good
governance of organisational corporate activities is highly significant in emerging markets
where protection of investors are comparatively less than emerging markets. For example,
investment risk in emerging markets is higher than that of leading economies like the UK,
USA, or Germany. Similarly, capital cost is also comparatively higher than in economies
where the political conditions are found turbulent or where judicial enforcement or legal
framework is not well-developed according to the interests of investors.
It has been noticed that investors keep a positive intention to provide extra-payment of 14%
more for well-government companies in the USA, or 13% more for well-governed companies
in the, or 25% more for well-governed companies in the UK (The Organization for Economic
Cooperation and Development, 2022). Therefore, governance of firms in a country means
allowing firms to have proper and easier access to domestic as well as international capital

5
markets in compliance with the prescribed standards for good corporate governance. The
fundamental aim is to drive the performance of firms positively with investor and capital
support and gaining benefits to the country’s economic prosperity, stability, and performance
on a long-term basis.
For instance, the UK is one of the attractive markets for investors despite the effect of Brexit.
A report by White (2021) claims that the UK ranks 5th in the list of most attractive foreing
investment countries in the world due to its good corporate governance framework and
practice. According to the report by Cook (2022), UK-based SMEs who employ between 1
and 249 employees employ around 44% of the British workforce alongside contributing more
than £2 trillion in turnover. Similarly, Rowinski (2022) reveals that SMEs in the USA not
only account for approximately 62% of employment creations but also are responsible for
44% of US economic activity. On the other hand, SMEs that make up up to 99% of German
companies are accounted for generating 35% of total corporate turnover in Germany.
(Federal Ministry of Economic Affairs and Energy, 2022). Therefore, it is obvious that the
economic performance of business organisations within a countries’ economy is the most
important factor for the survival of a nation’s economy. On the other hand, economic
performance of organisations largely depends on the access to either domestic or international
capital investors. As good corporate governance framework and practices are key factors to
attract such investors, it will be justifiable to claim that governing of firms is necessary to
bring ease for firms to capital access, and in turn enhancing the country’s economic stability
and long-term sustainability.
Reduction of agency costs
According to The Organization for Economic Cooperation and Development (2022),
organisations play a pivotal role in the growth of any countries’ economy. This is why good
corporate governance is considered an important segment for the economic growth of any
country. Improvement in economic efficiency and growth as well as enhancement of
investors’ confidence can be done by adhering to corporate governance practices and
standards. Compliance with such standards and practices helps firms to reduce the conflict of
interest that may occur between different stakeholders participating in the governance
(Charkham, 2005). As a result, such reduction of conflict of interest obliquely leads to a
significant reduction in agency costs alongside enhancing confidence of stakeholders. As a
result, a harmony between the investors and business creates, which in turn caters to positive
business growth and performance. With regard to such positive growth in business, the
economy of the nation under which the company manages its business operation is also

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improved. Constant improvement in the economy through financial contributions from
business in areas like GDP and employment also allow the country to ensure economic
stability. Figure 1 shows the GDP rate of countries like USA, UK, and Germany from 2010
to 2027:

Figure 1: GDP rate of the USA, UK, and Germany from 2010 to 2027
(Source: Statista, 2022)
Although leading economies such as the USA, UK, and Germany have noticed a decline in
their GDP (mainly due to the pandemic-led-crisis), a significant stability in the GDP rate
from the years 2010 to 2018 can be well noticed. During the early-pandemic era, the GDP
rates of the UK (-9.27%), USA (-3.415), and Germany (-4.56%) were much negative
(Statista, 2022). However, just after the world started adapting the pandemic-led new normal
forms of business, all of the three countries have noticed an increment of 7.44% (UK), 5.68%
(USA), and 2.79% (Germany) increase in their GDP. The presence of a good corporate
governance system and business organisations’ appropriate follow up of all practices and
standards of governance leading to attracting potential investors can definitely be considered
as a reason for such positive improvement in the GDP of these three countries. On the other
hand, lack of presence of good corporate governance will hamper the access of firms to
domestic or international capital, which in turn may lead the respective country to witness
poor economic growth or stability. Therefore, from this point of view, it can be said that the

7
presence of good corporate governance for firms is one such aspect that determines economic
stability and long term performance of a countries’ economy.
Influence of financing of firms on determining leading economies’ stability and long-term
performance
Business Finance is one such area that allows organisations to execute a business idea in
operations by attaining all financial needs. This is why a work by Fowowe (2017) has
commented that insufficient finance is one of the key obstacles to the growth of any firm.
Financing firms within the nation also allows an economy to be stable and retain positive
performance on a long-term basis. This is because business finance ensures constant
availability of money to attain the economic needs of managing any business operations or to
execute a business idea (Brigham and Houston, 2021). Profitable performance of any
business also provides positive support to the economy of the nation.
During the onset of the pandemic, the business world across the world witnessed severe
economic rescissions. Many businesses were finding it hard to survive in the market due to
loss of investment and profit. However, business finance from their respective government
allowed them to ensure proper financial support and overcome the recession. For example,
the UK Government introduced various loan schemes such as “Coronavirus Business
Interruption Loan Scheme (CBILS)”, “Bounce back loan scheme (BBLS), and Coronavirus
Large Business Interruption Loan Scheme (CLBILS)” (BDO UK, 2022) to help businesses in
the country to survive during the pandemic. Similarly, the USA government has lended
positive economic support by offering financial schemes like “Economic Injury Disaster
Loan”and “Shuttered Venue Operations Grant” to help businesses recover from the pandemic
crisis. On the other hand, the German Government provided schemes like “Economic
Stabilisation Fund (ESF)”, “KfW programmes”, or “The Temporary Aid Programme IV” as
assistance for companies during the pandemic (Federal Ministry of Finance, 2022). Although
these schemes were provided as an immediate and much needed aid for business
organisations in the covid-era, the aim of each country's government was to finance and
rescue their business world who acted as the pillar to the nation’s economy.
Such finance has allowed business to overcome financial losses resulting from the pandemic-
led rescission and fulfil the economic needs of business operations. As a result, companies
operating within these economies became able to stabilise their business operations and
ensure growth. Such growth in turn has resulted in improving the economic health of those
countries (see figure 1 for GDP growth rates of the UK, USA, and Germany after 2020). On
the other hand, without business finance or economic support of the government, it would

8
have been much difficult for organisations in this industry to fi;llup up the loophole in their
financial wealth extended by the pandemic-led rescission. Therefore, in light of these
discussions, it can be said that financing of firms determines economic stability and long term
performance by helping businesses to fulfil their economic needs and encouraging them to
contribute to the national economy.

Conclusion

Growth, stability, and long-term performance of a nation’s economy largely depends on the
extent to which companies in the country contribute to the economy. In order to help
businesses to generate positive economic output, country-level governments constantly
encourage organisations to adhere to good corporate governance practice, so that the access
to domestic as well as international capital can be easily availed. As a result, business
organisations will be able to generate more profit and contribute to the growth and stability of
the nation's economy. Similarly, business finance ensures organisations a constant
availability of money required for performing specific business activity or operation.
Therefore, country-level governments should monitor the extent to which business
organisations comply with their corporate governance framework in order to avoid any
negative consequences.

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