European Institute of Management and Finance | The Impact of good Corporate Governance
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The Impact of good Corporate Governance

11 Jun The Impact of good Corporate Governance

Corporate Governance is widely accepted to cover how a company is directed and controlled while placing emphasis on the role of a company’s management, its board, its shareholders and other stakeholders and the relationships between these actors. Several codes and papers, along with academic research, have converged as to what is considered good corporate governance.

Achieving good corporate governance practices, helps companies operate more efficiently, improve access to capital, mitigate risk, and safeguard against mismanagement. It makes companies more accountable and transparent to investors and gives them the tools to respond to stakeholder concerns in an efficient manner. It also contributes to development since increased access to capital encourages new investments, boosts economic growth, and provides employment opportunities.

Overall, it ensures that an organisation is managed in a manner that fits the best interests of all. Specifically, Ocorian, a leading international firm in the provision of corporate and fiduciary services, highlights certain beneficial impacts that add value to organisations that adopt good corporate governance practices. Such favourable effects include:

  • Risk mitigation – An effective corporate governance framework helps to mitigate risks that can severely impact an organisation and its stakeholders/interested parties, by providing shareholders in non-listed companies with the comfort that although their exits may be difficult, their interests will be safeguarded by the board and management.
  • Improved capital flow with reduced capital cost – An increase in confidence by investors and banks in the company due to robust financial management reporting will not only improve access to capital, but also minimise both cost of capital and cost of equity, resulting in an optimised capital flow. Deciding on an appropriate capital structure is thus a key element of good corporate governance. Transparency, especially regarding everything of interest to investors, will command a lower risk premium and, therefore, also contribute to reducing the cost of capital and equity.
  • Increase in share price – The value of the organisation will be positively affected
  • Reputational boost and brand formation – Transparency in a company’s internal policies, control mechanisms and how it deals with its suppliers, vendors, media, staff and government bodies will boost its reputation and thus its brand value.
  • Company image – Through its adoption of an appropriate corporate social responsibility strategy and the allocation of necessary resources, the Board can address issues within the society that it operates and thus build a favourable image for the organisation.
  • More effective, better decision-making – Good corporate governance also aims at a faster decision-making process by establishing a clear delineation of roles between owners and management.
  • Quality of information – Improved reporting of data in turn leads managers and owners to make more informed and fact-based decisions, leading ultimately to improving sales margins and reducing costs.
  • Focus on compliance – Good corporate governance will adequately rest on policies requiring the company to stay compliant with local laws and regulations; it will synchronise risk management and compliance to ensure the company has proper control mechanisms, meets its objectives and operates efficiently in terms of people, processes, technology and information.
  • Higher staff retention – An increase in staff retention and motivation can be expected, especially from senior staff, when the company is consistent in pursuing a well-defined and communicated vision and direction. Additionally, millennials – now the largest single group on the labour market in many countries – tend to rank an organisation’s commitment to responsible business practices highly in their employment choices.
  • Limitation of disruptive behaviour, corruption, wastages and conflicts of interest – This is achieved by establishing rules to reduce potential fraud and malpractices among employees; and, by avoiding conflicts of interest namely through minority shareholders being given their share of voice by being represented by independent directors.

Corporate Governance, in a nutshell, is a toolkit that enables the management and board to deal more effectively with the challenges of running a company. It ensures that businesses have appropriate decision-making processes and controls in place so that the interests of all stakeholders (shareholders, employees, suppliers, customers and the community) are balanced and the future development of a company is set on a sustainable trajectory.

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