Whether big or small, for every business to grow, good governance is essential. There is no shortage to the benefits of what a governing board can bring to an organization, however some priorities are- (1) Risk management: facing a variety of risks is a daily occurrence for business owners, and having a board to assist with managing them when they arise is an extremely valuable asset to have. Directors notes that a board plays a vital role in ensuring a company takes the necessary precautions when dealing with risk, while also maintaining the pursuit for adding value to the company. Each company’s risk profile differs depending on its life cycle stage and what industry it operates in. For this reason, it is not uncommon for companies to invite external independent directors to sit on their board.
Independent directors are valuable because they offer Insight into different approaches to risk mitigation, Extensive networks that can be tapped into for specific expertise, General know-how when it comes to fully evaluating a particular risk. (2) Accountability: for many business owners, it can sometimes be difficult to focus on strategy when they are immersed in the day-to-day operations. Having a governing board in place one that regularly monitors progress against agreed actions will ensure the business stays on the right path to achieve both short and long term goals. (3) Focuses on big picture: closely linked to the point above, a good governance framework will push a business to think about the big picture and seek answers to tough questions that test the future of the company. Board meetings are specifically about providing leadership thoughts on how to develop, grow, improve and increase the overall success of a business through implementing high-level strategy.
By having governance in place to help oversee those critical factors, it enables business owners to ensure they focus on these things as well on a very regular basis. (4) Expansion of leadership skillset: Depending on the experience of the business owner, there could be some core skills missing from their leadership capabilities so a carefully selected governing board has the potential to bring different abilities to the table.
The result is more qualified advice and direction. Governance as advice on matters a business owner knows little about, but which has the potential for significant consequences on the business. It is about having an individual or a group of people who have specific and complementary skills and independence of thought. (5) Challenge the status quo: also known as ‘playing devil’s advocate’, having a good governing framework in place allows for people, independent of a business, to provide challenging thoughts, ideas and advice to owners about their strategy and future growth plans. When we live and breathe a company on a daily basis, it is easy to hold on to set of assumptions and not veer from the ‘tried and tested’ path. A good board will push to challenge the status quo whether it is still working or open to possibility of a better alternative and provide valuable insight into changes the business might make.
Good corporate governance versus creating company value: Sound corporate governance has become a pre-requisite to reaping investor confidence and unleashing shareholder value, evidence shows that some key benefits come to the companies. Good corporate governance builds trust and predictability which in turn comforts investors, it is also evident but there are several other key benefits it provides: Improved capital flow – 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 minimize both cost of capital and cost of equity, resulting in an optimized 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, therefore lowering the cost of capital and equity. Risk mitigation – an effective corporate governance framework helps to mitigate risks, 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. A good governance framework will also induce reflection on exit strategies, giving additional comfort to prospective shareholders deciding whether to invest in the company.
Reputational boost – 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. More effective decision-making – Good corporate governance also aims at a faster decision-making process by establishing a clear delineation of roles between owners and management. Improved reporting – Improved reporting on performance in turn leads managers and owners to make more informed and fact-based decisions, which contributes to improved sales margins and reduced costs. Focus on compliance – Good corporate governance will rest on policies requiring the company to stay compliant with local laws and regulations; it will synchronize 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 has a well-defined and communicated vision and direction.
A focus on the company’s core business will also make it easier to penetrate the market and attract the interest of shareholders. Additionally, millennials – now the largest single group on the labor market in many countries – tend to rank an organization’s commitment to responsible business practices highly in their employment choices. Limitation of disruptive behaviour and conflicts of interest – By establishing rules to reduce potential fraud and malpractices amongst employees; and avoiding conflicts of interest namely through minority shareholders being given their share of voice by being represented by independent directors.
Empirical evidence has emerged showing a correlation between corporate governance and stock market performance of listed companies. In non-listed companies, private equity investors typically show a greater appetite for companies more prone to embracing good corporate governance standards and practices. Now a days, corporate governance has become a pre-requisite to reaping shareholder confidence and unleashing shareholder value. Increasingly, investors will be assessing the governance capital of target companies as closely as they scrutinize its technological and human capital. Good corporate governance also helps companies to weather the consequences of an economic downturn with more agility.
Corporate governance versus companies’ growth: High growth companies face many challenges, encompassing the numerous demands of new product innovation, market shares and customer satisfaction. Evidence shows that initial growth firms have lower corporate governance notches when compared to other firms. Revival firms showed higher notches, indicating that a well-developed system of corporate governance added a much needed synergy for growth. It is believed that good corporate governance practices assist significantly in uplifting corporate performance, and brings in business success and sustainability. Some empirical studies also suggest that Board Size and the Board Independence exercise strong influence in explaining the Corporate Sustainable Growth after controlling the effect of Leverage. Corporate governance practices on corporate sustainable growth in Asia concerned Board Size and the Board Independence exercise a profound influence in explaining the Corporate Sustainable Growth.
However, no significant linkage could be established between the other selected explanatory variables viz. CEO’s Duality, Proportion of Women Directors on Board, Boards Education, Presence of Family Affiliation on the Board. In the context, larger boards and lesser board independence i.e., a limited proportion of independent directors on the board are the key contributors to the corporate sustainable growth. In sum, it can be asserted that good corporate governance practice not only brings in superior management and business performance but also, enables a firm to attain affordable heights.
In broader sense, corporate governance matters for growth and development : Evidence shows that identified several channels through which corporate governance affects growth and development i.e., Increased access to external financing by firms can lead, in turn, to larger investment, higher growth, and greater employment creation, Lowering of the cost of capital and associated higher firm valuation makes more investments attractive to investors, also leading to growth and more employment, Better operational performance through better allocation of resources and better management creates wealth more generally, Good corporate governance can be associated with a reduced risk of financial crises which is particularly important given that financial crises can have large economic and social costs, Good corporate governance can mean generally better relationships with all
stakeholders, which helps improve social and labor relationships, helps address such issues as environmental protection, and can help further reduce poverty and inequality.
All these channels matter for growth, employment, poverty alleviation, and well-being more generally. Empirical evidence using various techniques has documented these relationships at the level of the country, the sector, and the individual firm and from investor perspectives. More and more robust evidence has been found to enlarge understanding of these relationships across a wide range of countries.
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