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Sound Corporate Governance and Its Impacts on Growth

November 28, 2017

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Sound corporate governance is an important tool to help organizations create attractive investment environments. Governance is a means of addressing individual issues like executive pay or board succession, and it can provide an array of benefits for organizational growth and performance.

While some areas of the world may be lagging behind others, the global movement to implement sound corporate governance is well on its way, and each year brings new improvements in governance strategy, analysis, and reporting. 

Growing Interest in Corporate Governance

Initially, corporate governance may have been dismissed as a fad or a superficial practice, but these sentiments are being replaced with the recognition that good corporate governance can foster competitive advantages. 

According to Rashid bin Ali Al Mansoori, CEO of Qatar Stock Exchange, the strong interest in corporate governance is a result of several factors, which include:

  • Greater complexity of the legal and regulatory environment
  • Increased investor participation in market development
  • Growing awareness among investors of the risks associated with a failure to implement good governance
  • Positive effects of corporate responsibility on local communities

Thus, corporate governance principles function as responses to needs, both within the organization and externally. 

Good Corporate Governance as a Means of Attracting Investment

Compliance with governance rules carries many benefits, all of which can support a company’s goals for growth. Effective governance can:

  • Help listed companies obtain financing
  • Ensure maintenance of company share value
  • Increase long-term sustainability
  • Improve transparency of process and reporting
  • Foster responsible management practices

Similarly, healthy corporate governance ratings can be viewed as an indicator of an organization's commitment to sound policy and protecting the rights of minority investors. 

Effective corporate governance policies are increasingly viewed as a means of attracting investment and even helping to stimulate national growth. In Ghana, Central Bank Manager Michael Anyamesem says that one of the main failures of rural/community banks is weak corporate governance systems. He urges the banks to strengthen internal controls and governance structures in order to make operations more efficient. 

Specifically, Anyamesem calls for directors to upgrade their skills and knowledge in governance matters in order to effectively analyze financial statements passed on to them by management. 

In order to further ensure good corporate governance in banks, the Bank of Ghana has also developed Corporate Governance Directions and Regulations. Among other things, the Directions:

  • Limit tenure of directors and external auditors
  • Stipulate possession of certain competencies by directors
  • Provide guidance on internal controls and compliance systems

IoD Releases 2017 Good Governance Report

The Institute of Directors (IoD), based in London, recently released the 2017 Good Governance Report, a report initiative that has been instrumental in promoting the study and development of corporate governance. The report creates a Good Governance Index (GGI) of companies, calculated by analyzing scores across 47 corporate governance indicators. 

These indicators are then grouped into five broad categories:

  • Board Effectiveness
  • Audit and Risk/External Accountability
  • Remuneration and Reward
  • Shareholder Relations
  • Stakeholder Relations

The study shows that among the five governance categories, the indicators that measure Audit and Risk/External Accountability are most strongly correlated with external governance perceptions. The indicators covering Board Effectiveness are the least correlated. This data may indicate that stakeholders are currently placing more value and importance on robust risk governance systems. In turn, an increased focus on risk can help organizations make decisions that promote growth and avoid unnecessary risks. 

The indicators were selected in order to create a broad reflection of corporate governance. A unique feature of the index is that it applies a stakeholder survey of governance perceptions to each governance category when computing final scores. 

This contrasts with older approaches for governance indices, which attached equal weight to indicators. The result is a more accurate picture of how indicators affect governance perceptions, as well as a reduction of manipulated data in reports. 

Corporate Governance Updates Around the World

Asia Corporate Governance Updates
In Asia, many countries, including Japan and South Korea, are making progress in governance, but still face issues with regional practices such as cross-shareholding (known as keiretsu). This is when corporations own each other’s stock, and may create situations where companies are hesitant to challenge one another. It can also create conflicts of interest as well as difficulties in reporting. 

Despite the ongoing issues with cross-shareholding, there has been an emergence of “constructive activists” or “engagement funds,” which aim to address governance issues in a less confrontational, more cooperative and engaging approach. Constructive activists often share well-researched analysis with management and connect them with networks of potential partners. 

Proposed Governance Changes in the UK
The UK government has published several headline proposals regarding the reform of corporate governance for publicly traded and large privately held companies. The proposals cover three main aspects of corporate governance: 

  • Executive pay
  • Strengthening the employee, customer, and supplier voice
  • Governance in large privately held businesses

The reforms are set to go into effect in June 2018. An introduction of mandatory corporate governance reporting for large privately held businesses underscores the regional impact these organizations can have. 

As the scope of corporate governance applications widens, and as governance reporting becomes more accurate, organizations can reap valuable benefits from implementing sound practices. This can help avoid entanglement in legal issues, and can allow companies to focus on growth and performance.

If you have any questions about corporate governance or other complex legal matters, contact us today at Kessler Topaz. Our team is passionate about giving shareholders a voice in corporate governance. We have helped our clients implement creative, effective government changes in diverse areas.