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Good Corporate Governance Is a Great Idea, But Is Anyone Practicing It?

BV Acharya 24

Good Corporate Governance: Why Have it, Who Has It and Who Doesn’t

Imagine a company with an excellent track record. So promising that it titillates even you- the most cynical of investors, into pumping your hard-earned savings to get a piece of its pie. 

And it pays off! The company’s industry is a sector rife with potential, and from where you stand, the future looks bright. 

Profit margins are through the roof, shareholders are earning mega dividends, and the share prices continue to soar! What could go wrong?

Yet suddenly, like a thunderbolt striking on a sunny day, there is news that the company management has been having sleazy deals and engaging in grand corruption.

With the track record that the corporation has been having, most people (you included) are reluctant to buy into this story. 

You suspect it must be fake news, the kind that gutter publishers are fond of publishing.

However, like hawks swooping down on prey, inter-country governmental investigative agencies suddenly descend on the once reputable corporate

Deploying heavy artillery, they soon announce that the company has made dubious payments of over 1.5 Billion USD. These include bribes and other forms of corruption.

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In quick succession, hefty criminal charges are leveled against the company, and before you know it, the once reputable institution has racked up massive penalties of over 2.6 Billion USD! 

Such was the 2008 Siemens scandal, a corporate governance failure of seismic proportions that shocked the global business community.

Looking at such a case study, the importance of good corporate governance cannot be overstated. 

Luckily, there are governance experts at hand to guide you in all corporate sinkholes. 

They understand that governance is not only about oversight and accountability but is also future focused on strategy, risk and policy. They aid you in forecasting corporate governance trends, assessing board, CEO and Chair performance and making sure that your corporate governance is fit for the future..

But What Is Good Corporate Governance?

Corporate governance is a wide-ranging concept that involves strict discipline in company management operations.  Its about how power is exercised in a company and reflects rules, regulations, ways of working and accountability.

It entails internal audit and accounting controls, meticulous record-keeping, legal audit and regulatory compliance, and risk control via internal regulatory frameworks.

With proper corporate governance, a company is placed in a position of integrity and can perform optimally to achieve its goals.

Why Companies Need Good Corporate Governance

Sound corporate governance is a roadmap to sustainable business and a robust bottom-line for any company. It is the magnetic force that attracts and retains the corporation’s sterling reputation and brand visibility.

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In the long run, a well-governed company is a hotbed of investor confidence. Good Corporate governance is especially critical in the following areas:

  1. Raising Capital

By optimizing the company’s value and output through proper corporate governance, its credit ratings automatically go up. 

That means that a well-governed company has an easier time raising capital and getting access to extra credit from financial institutions. 

According to a KPMG report titled ‘KPMG in Russia and the CIS,’ investors have no problem paying more for shares of a well governed company.

Therefore, your company’s corporate governance will always have a direct impact on its capitalization.

  1. Shareholder Satisfaction

Naturally, where there is greater transparency, investors are less jittery about increasing their share portfolios.  Investors are also less likely to be antagonistic or activists when corporate governance is effective.

Their decisions are informed in part by the fact that the corporation has gained market confidence due to its sound governance structures. 

That market confidence, in turn, promises a better share price and, therefore, greater return on investment. 

  1. Director Attraction and Retention

A company is only as good as the caliber of professionals that run it. 

As such, more and more companies are stepping up their director selection game through thorough vetting of directors and salary incentives.

The more elaborate and organized a company’s governance structure and procedures are, the better it is in talent selection and retention. 

An excellent way to go about this is by engaging professional corporate governance specialists, who will offer invaluable advice on corporate director and CEO evaluation, customized tips on governance strategies, and much more.

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  1. Debt Security

Suitable governance structures result in stringent guidelines on the use of company assets and resources, and consequently, more significant profit margins.

All this is reflected by a company’s balance sheets and P&L accounts.

Well governed companies with healthy balance sheets can secure debt finance more quickly and on more favorable terms than those with shaky financial outlays.

  1. Growth, Mergers, and Acquisitions

As stipulated by the company’s Articles of Association, the rules of corporate governance are the compass that drives company growth and expansion.

During mergers and acquisitions, these policies determine the process to be followed before the merger/ acquisition and after that.

Corporations with clear procedural rules enjoy almost seamless merger and acquisition processes compared to their counterparts who adopt stop-gap measures as they go along.

Some of the merger and acquisition issues addressed under a good governance structures include non-transferring shareholders’ rights, share transfers, and human resource/labor issues.

Details on how you can enhance your company’s strategic business planning through good corporate governance are available here.

Companies That Won the Corporate Governance Challenge and Those That Didn’t

In the 2020 edition of the World Finance Awards, several companies worldwide were recognized for their outstanding corporate governance models.

Among the winners in the corporate governance segment were Interac (Canada), Maersk (Denmark), and DataBank Group (Ghana).

These companies ranked highly due to their diverse management boards, ethical and transparent practices, and timely communication of reports.

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The winning list comprises corporations that scored well on three key areas: environmental, social, and governance (ESG) issues.

In contrast, companies known to have had bad corporate governance ratings in the past include Enron and Siemens. 

In more recent times, we have had Volkswagen, BHS, Wells Fargo, and Boeing.

The bane of their disrepute ranges from corruption, embezzlement, fraudulent schemes, failure to deliver (sometimes at the expense of people’s lives), etc. 

All these factors invariably led to public distrust in the companies concerned, which catalyzed their downfall.

 

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