The benefits to a company of practising good corporate governance are now well known. It can raise capital more cheaply in a world where capital is a scarce resource; when it has a downturn it will have support from its stakeholders in its turnaround attempt; its business will be more sustainable; when the board makes a wrong business judgment call – and dealing with uncertain future events it will do so – it will not be seen as a scandal but as a consequence of the risk/reward ratio involved in equity investment; and its reputation is enhanced.
While there is empirical evidence establishing these benefits the question remains what is good corporate governance? Does it follow that a company which religiously follows the guidelines of a code applicable in its country of registration is practising good governance?
The quantitative application of guidelines has, in certain instances, become a mindless occupation. Some companies have even appointed compliance officers to tick off the company’s compliance with the guidelines. The compliance officer reports to the board that there has been compliance. This evidences a lack of application of mind by the board as to whether it is governing in an acceptable manner.
When all is said and done the market place is the ultimate compliance officer. That is why in several jurisdictions the route has been chosen of “comply or explain” in regard to how a company is governed rather than “comply or else”. In a regime of comply or explain the directors are duty bound to apply their minds as to the guidelines which are most suited for the business of the company. If they believe that non-compliance with a guideline is in the interest of the company and they explain it the true test will be whether the market accepts that explanation or whether stakeholders flee the company. If investors and other stakeholders continue to support the company then the question answers itself.
The strategic or business plans developed by a board involve dealing with uncertain future events. It is not a science and none of us is prescient. The governance of a corporation is a process so that, inter alia, outsiders looking into the company can assess whether the company is being well governed. But it does not follow that if there has been a pure quantitative compliance with a code’s guidelines that the company is being well governed. Witness Enron with all its trappings of good governance and yet it was dysfunctional.
What is essential for good governance is that directors apply their minds as to which governance processes are in the best interests of the business of the company. There are, of course, certain basics which have become necessary in the governance of companies such as outside directors and audit committees but nothing, other than these basic principles, should be seen as the law of the Meads and the Persians that altereth not. What is needed is an honest application of mind as to what is in the best interest of the company.
In the end it is the evaluation of the quality of the governance by the company’s ultimate compliance officer, the market place, that is important
The benefits of good corporate governance for private companies Globally, the application of Corporate Governance to businesses tends to centre on public companies and financial institutions. However, private companies that practice good corporate governance can expect to enjoy real and tangible rewards; a better managed business is likely to lead to improved efficiency, which in turn is likely to affect the bottom line. In addition, the practice of good corporate governance by private companies is likely to result a healthier, more sustainable, economy in the longer term.
Key benefits of good corporate governance for private companies • A better managed business – improved efficiency
• Less exposure to risk
• Compliance with anti-corruption legislation
• A more attractive investment
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