In recent years greater focus has been placed on corporate governance following a number of large-scale corporate and market failures. The ICSA – The Governance Institute describes corporate governance as “the way in which companies are governed and to what purpose. It is concerned with practices and procedures for trying to ensure that a company is run in such a way that it achieves its objectives”. It is believed that the implementation of a robust corporate governance framework will aid in the prevention of future corporate wrongdoings and provide comfort not only to shareholders but to an organisation’s wider stakeholder group.
Internationally, governments and corporate governance bodies have taken two approaches to encouraging good governance in public listed companies – a ‘comply or explain’ approach or enacting regulation to ensure compliance. Either way, general consensus amongst industry groups is that good corporate governance supports management whilst also benefitting employees, shareholders and the community. Privately-held companies, which are not obligated to follow the stricter requirements set down by regulation, may question the extent to which they should introduce good governance practices within their organisations. A widely-held view is that small, privately-held companies operating on a global scale may find that good governance is a necessity which provides competitive advantages. Indeed, a recent Credit Suisse analyst report suggests that family-owned businesses represent “compelling investment opportunities” – for this reason, good governance signals to the market that an organisation is well managed and that the interests of management are aligned with other stakeholders.
The following five points highlight the value that good governance can create for private companies:
INCREASES TRUST – Businesses do not exist in a vacuum. Organisations that are cognisant of the role they play in wider society will typically seek to behave in a transparent manner by providing clear and accurate information to their stakeholders on a regular basis. When all stakeholders feel able to rely upon the data provided by companies this leads to increased levels of trust and organisations are able to develop stronger, longstanding relationships with their stakeholders. The benefits that can be reaped are numerous and varied – from favourable credit terms to repeat business.
ENHANCES SUSTAINABILITY – A company committed to good governance is more able to quickly identify and resolve any systemic issues thus reducing the likelihood of costly corporate crises and scandals. Of course, matters may arise which an organisation was unable to anticipate but with a governance system in place that is geared to manage such eventualities, an organisation can respond quickly in order to safeguard its reputation and future.
ENCOURAGES POSITIVE BEHAVIOURS – Significant focus has been placed on the role that culture plays in the success of an organisation. Having clearly delineated policies and processes and a board of directors and executive managers who take an interest and responsibility for such matters can help to prevent future failures whilst setting the organisations cultural expectations. It is said that ‘the tone of an organisation is set at the top’ meaning that the chairman and CEO are protagonists of the organisational culture. It is therefore imperative that all board members take an active interest in the activities of the company and ensure clear lines of communication and responsiveness to dealing with any move away from the positive culture that they seek to imbue throughout the organisation.
LOWERS THE COST OF CAPITAL – In today’s volatile environment, the implementation of good governance practices may lead to a reduction in a company’s cost of capital. An organisation that is seen to be stable, reliable and able to mitigate potential risks will be able to borrow funds at a lower rate than those with no, or weak governance systems. Companies with debt or equity investors may find that their investors pay a premium for the comfort they obtain in knowing that the company has a sound governance framework.
MINIMISES WASTE, RISKS, CORRUPTION AND MISMANAGEMENT – Companies committed to implementing and maintaining good governance practices will likely find that certain risks are drastically minimised. This is because strong governance practices typically increase levels of transparency, trust and integrity, all of which create an environment conducive to reducing risks, opportunities for corruption and any source of mismanagement.