Corporate governance is crucial for gaining investor confidence and unlocking shareholder value. John Félicité, Business Development Director, explores the key benefits it provides to companies. In this article, we define corporate governance, outline its benefits, and explain why private equity investors are more interested in companies that adopt good governance practices.
What is corporate governance?
It is a framework that helps companies operate effectively. It defines the relationships between management, the board, shareholders, and other stakeholders.
While the drive for good corporate governance is generally associated with publicly listed companies, the governance benefits to non-listed companies are less often talked about – in many countries, national codes of corporate governance set out practices and standards that are desirable but not mandatory for non-listed companies.
With non-listed companies as the main component of a nation's economic fabric, the role of good corporate governance in enhancing shareholder and investor value should not be overlooked.
What are the benefits of good corporate governance?
Sound corporate governance builds trust, predictability, and investor confidence. Here are eight ways it can enhance your company's value:
1. Improved capital flow
A robust financial management reporting system increases investor and bank confidence, improves access to capital, and lowers the cost of equity and capital, resulting in an optimised capital flow. Another key element is deciding on an appropriate capital structure that is transparent to investors and will command a lower risk premium.
2. Risk mitigation
An effective 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 framework will also induce reflection on exit strategies, giving additional comfort to prospective shareholders deciding whether to invest in the company.
3. Reputational boost
Transparent internal policies and control mechanisms enhance a company’s reputation and brand value.
4. More effective decision-making
Good corporate governance establishes a clear delineation of roles between owners and management, speeding up the decision-making process.
5. Improved reporting
Fact-based decisions, reduced costs and improved sales margins result from better performance reporting.
6. A focus on compliance
Good corporate governance ensure that companies stay compliant with local laws and regulations. The synchronisation between risk management and compliance is essential to make sure that the company has proper control mechanisms in place and can meet their objectives, as well as operate efficiently in terms of people, processes, technology, and information.
7. Higher staff retention
A well-defined vision and direction enhance staff motivation and retention, making it easier to penetrate the market and attract the interest of shareholders. Millennials makeup the largest single group on the labour market in many countries and highly rank an organisation’s commitment to responsible business practices in their employment choices.
8. Limitation of disruptive behaviour & conflicts of interest
Rules reduce the potential for fraud and malpractices amongst employees, and avoid conflicts of interest by allowing minority shareholders to be represented by independent directors.
The growing importance of corporate governance
Over the years, the link between corporate governance and stock market performance has become more evident, with investors paying closer attention to a company's governance practices before investing. Private equity investors are also showing a greater preference for companies that embrace good corporate governance standards.
Today, the principles of corporate governance have become essential to gain shareholder confidence and maximize shareholder value. Moreover, companies with good governance practices are better equipped to navigate economic downturns with agility. As such, it is becoming increasingly important for companies to prioritise corporate governance as a critical component of their overall strategy.
How can Ocorian help?
Partner with us to enhance your enterprise and investor value. Our board evaluation, administration, and compliance services help companies enter new markets, navigate complex regulatory environments, so you can focus on your core business activities.
Contact us to discuss how we can help improve your corporate governance.