At the same time, I think awards are legitimate and important. This is a business fraught with negative incentives. We all have drafts which don't make it to final. I personally have well over 1,000 rejection letters. Stories go into print, and get bad reviews. Or worse, no one notices at all. Which, frankly, is the fate of many if not most stories and novels.
So if roughly 3,500 short stories and 600 novels come into print each year in our field (see here for a bit more on this), and several dozen of them land on award ballots, that's a very narrow ratio of recognition in its own right. Even if you take a very broad view of awards, as Cheryl Morgan and kevin_standlee have done at the new Science Fiction Awards Watch, the nominations don't exactly overflow the pool of what's published.
Awards are the way we recognize each other, honor each other, support each other. Is the awards process full of insider wank? Of course. Just like student council elections, politics at any level, the workplace, the Elk's club, the Oscars, or any other human activity. Like I said the other day, we're monkeys. It's what we do.
As for the awards processes themselves, of course they're imperfect. At one point I looked at establishing an award for excellence in anthologizing. The logistics of doing that were daunting. Establishing the credibility was perhaps the most difficult aspect.
Why awards? We all need a reason to smile, laugh and pound each other on the back from time to time. Writing is such a profoundly solitary pursuit that anything which offers social reinforcement is to be treasured.