Corporate Governance, External Environment and Organizational Performance A Review of the Current Empirical and Theoretical Evidence

Abstract

The study aims to review and expand general understanding on the relationship between corporate governance, external environment and firm performance. The study is motivated by the current debate on strategic role of external environment in corporate governance on organizational performance relationship. Using narrative review as its guiding approach to draw themes and insights, the study examines empirical and theoretical literature that looked at the influence of the external environment on the relationship between corporate governance and organizational performance.
The study is anchored on three theories; the agency theory (Jensen and Meckling (1976), resource dependance theory (Pfeffer, & Salancik, 1978) and Resource based view (Birger Wernerfelt, 1984; Barney 1991). The agency theory, explains the relationship between the two key players of an organization, the principal, who is the owner, and the agent, who is the manager. The resource dependency theory suggests that the external environment holds resources which are needed by the organization to survive and that since an organization does not operate in a vacuum but in an environment, for it to succeed it must align its operations with the environment. In this paper focus is placed on external environment as one of the strategic resources which play a key role in the relationship between corporate governance and organizational performance. In conclusion, this paper postulates that external environment influences the relationships between corporate governance and organizational performance.