When discussing the benefits of good corporate governance it is easy to point to examples like HIH, One.Tel, Westpoint and Opes Prime and say "See what happens when there is poor corporate governance". It is much more difficult however, to find examples that show the difference between good corporate governance and ordinary corporate governance.

A recent study released by the The Treasury entitled Corporate Governance and Financial Performance in an Australian Context examines the relationship between a company’s adoption of the Australian Securities Exchange (ASX) Corporate Governance Council’s Principles of Good Corporate Governance and Best Practice Recommendations and its financial performance in the areas of shareholder performance, operating performance and one year sales growth for the top 300 Australian listed companies. The study "found that companies with better corporate governance outperformed those companies that were less compliant. In particular, companies that were fully compliant with the ASX Corporate Governance Principles significantly outperformed companies that were not in the areas of Earnings Per Share and Return On Assets over the sample period." These results correspond to the findings of several other studies of corporate governance and performance in other countries.

Whilst this study found a correlation between corporate governance and financial performance, it was not able to identify the direction of the relationship - did better corporate governance result in higher performance or could better performing firms afford better corporate governance? As Justice Owen commented in the HIH Royal Commission:

“Good governance processes are likely in my view to create an environment that is conducive to success. It does not follow that those who have good governance processes will perform well or be immune from failure."
(The failure of HIH Insurance. HIH Royal Commission., 2003)

The report found that improvements in board structure, financial reporting and remuneration had the strongest influence on financial performance. However, the significance of these findings is weak as the companies surveyed have a relatively high level of compliance with the ASX principles and the areas identified represented the lowest levels of compliance. In addition, no attempt was made to measure the degree of compliance in each area.

It is more relevant to look at studies conducted in the US after the implementation of the Sarbanes-Oxley Act. Wagner, Steve & Dittmar (The unexpected benefits of Sarbanes-Oxley, 2006) found that as companies implemented the management systems required to demonstrate compliance with the Act, they have found that it also provides valuable insights into the operation of their business which management has been able to use to achieve increased efficiencies and cost savings through strengthened internal controls, better documentation, standardisation of processes and reduced complexity. Able (Private companies reaping the benefits of Sarbanes-Oxley, 2007) found that even though the requirements of the Act apply only to public listed companies, many unlisted companies found it advantageous to voluntarily adopt its principles as compliant companies are more attractive targets for mergers and acquisitions, and compliance simplifies the path for unlisted companies to become listed. More importantly, investors are more attracted to companies subjected to Sarbanes-Oxley and non-compliant companies are finding it harder to raise funds.

The OECD (Principles of Corporate Governance 2004) notes the presence of an effective corporate governance system, within individual companies and across an economy as a whole, assists in providing the confidence necessary for the proper functioning of a market economy. As a result, the cost of capital is reduced and firms are encouraged to become more efficient in the use of company resources.

Therefore good corporate governance and better financial performance may form a virtuous circle where improvement in one facilitates the improvement in the other.