If the world’s biggest companies like Google, GE, JP Morgan, HSBC, and Berkshire Hathaway have taught us anything, it’s that no business can overlook the importance of corporate governance. When utilising fundamental analysis, investors keep a close eye on the way companies keep management in check and ensure board independence, financial disclosure, and shareholder rights are functioning well.
Recent studies also show that the benefits of assessing governance go beyond simply avoiding company disasters. Good corporate governance can potentially increase a company’s valuation as well as its bottom line.
What is corporate governance and why it matters?
Corporate governance is a system of rules, practices, and processes by which a company is controlled and directed. It involves balancing the interests of its stakeholders and the large array of parties, often with differing interests. Therefore, what constitutes “good practice” in this context is mostly a matter of preference.
General corporate governance measures include placing constraints on management power, appointing non-executive directors and ownership concentration, it also entails ensuring proper disclosure of financial info as well as executive compensation and rewards.
What’s surprising is that corporate governance is still considered a secondary factor when it comes to impact it has on a company’s performance. Contrary to a company’s financial position, operating capabilities, and strategies, the effectiveness of governance practices was mostly seen as vital only in unique circumstances like merger-and-acquisition decisions and CEO changes.
However, the modern business sphere proved that governance practices are not simply a secondary factor. When a company’s share price tanks due to an accounting scandal, the importance of good governance practices quickly become obvious. Corporate disasters clearly show us that the absence of good corporate controls puts the company as well as its investors at great risk.
Investors have ignored the importance of good governance for years merely because academic research found no clear causal link when it comes to governance and financial performance.
Investors prefer a company with a solid corporate governance
Amidst all the disregard for corporate governance, investors are starting to ask for help in avoiding misgoverned companies and looking for well-governed ones. Governments, stock exchanges as well as securities overseers are starting to develop new rules and regulations that can help stop some of the worst cases of corporate catastrophes.
The public image of a corporation will instinctively echo the culture of that body. It follows, therefore that effective corporate governance has to be in the centre of the organisation since this, in turn, will be mirrored in the culture. To translate to another analogy, a healthy blood and bones are mirrored in the logically healthy look of a person, therefore an organisation whose internal functions are strong and efficient will certainly look so from an external perspective.
Now that you know the importance of a good corporate governance, it’s time to look for a partner or consultant that will help your company begin its journey towards it. Leadership and Governance Centre like ICLIF is dedicated to executive education, research, coaching and consulting services in the areas of leadership development, organisational effectiveness and corporate governance. You may go to their website to learn more about their services.