BENEFITS OF GOOD CORPORATE GOVERNANCE

1. Increased investor’s confidence

 Good CG enables the board to focus on attainment of firm objectives due to

an effective oversight.
 Better CG can also…
- Provide shareholders with greater security on their investments.
- Ensures the shareholders are sufficiently informed on decisions
concerning fundamental issues like amendments of statutes or the
constitution, sale of assets etc.
2. Improved access to capital markets

 Companies need new capital for expansion needed to support growth or

expansion strategy.
 Investors have lack of confidence to invest in companies with poor CG.
 Motive of investment and financing may be questionable
3. Reducing the cost of capital

 Sound CG – low risk

 Poor CG – High risk
 Low risk companies are able to borrow funds at a lower rate than those with
high risk companies.
 Investors are willing to pay a premium to invest with a company that has a
sound CG.
4. Improving top level decision making

 Sound governance assures quick access to quality information and effective

communication among stakeholders – higher performance.
 Diverse boards enable companies to have quality deliberation and
consideration of issues or proposals – well balanced, informed and quality
decisions.
 Good governance also enables rapid and accurate prioritising of actions –
invaluable in enabling the organisation to weather tough economic storms
and supports the organisation’s sustainability.
5. Assuring internal controls

 An adequate and effective control environment puts the board and senior
management in a better position to take action when the controls signals non
– compliance and respond to emerging risks promptly.
 Sound internal controls and risk management enable the board to identify
risks and devise strategy to manage those risks – reduce loss exposure.
6. Enabling better strategic planning

 Fast excess to quality information and good communication with senior

management enables the board to formulate more successful strategies
 This includes more effective allocation of resources and capital and…..
- Understanding the regulatory environment governing the business.
- Identifying and managing the reasonable interests of all stakeholders in
the business.
7. Encouraging positive behaviour

 Clear lines of communication, policies and processes, together with ethical

culture contribute to higher performance.
 The board and senior management that promotes such a culture and become
role models for employees encourage good behaviour.

8. Improving company’s reputation

 Companies known for good corporate governance attract quality

shareholders
 Creditors – source of finance
 Talented employees – enhance core competencies
 Vendor and supplies – provide quality raw materials and supplies.
 Higher transparency allows stakeholders to feel more confident because the
company has little or nothing to hide.
9. Fewer fines, penalties, lawsuits

 Corporate governance promotes compliance culture to adhere to local, state

and federal rules, regulations and laws.
 For example, as part of corporate governance, an executive management
team or board of directors might conduct a review of the occupational safety
and health and require various business functions undergo an internal audit
by an independent auditor periodically.
 The practice of making prompt disclosure prevents company from public
reprimand and fines by Securities Commission.
10. Decreased conflicts and fraud

 Corporate governance limits the potential for bad behaviour of employees by

instituting rules to reduce potential fraud and conflict of interest.
 For example, the company might draft a conflict of interest statement that
top executives must sign, requiring them to disclose and avoid potential
conflicts, such as awarding contracts to family members or contracts in which
an executive has an ownership interest.
  The company might forbid loans to officers and family members or the hiring
of family members.
 External audits or requiring checks over a certain amount to be approved and
signed by two people help reduce errors and frauds.

CONSEQUENCES OF POOR GOVERNANCE

1. Failing companies

 Accounting fraud e.g Enron, Worldcom, Transmile, Satyam, Parmalat

 Poor internal controls e.g Barings Bank
 Dominant personalities e.g Maxwell, Polly Peck
 Poor risk management and control e.g Lehman Brothers
 Managers make poor investment decisions – tale low risk or excessive risk
without proper due diligence.
 Poor performance – affects debt servicing ability hence higher financial risk.
2. Reputational problems

 Unethical business practices e.g Siemens, Volkswagen (bribery), Singtel and

Wells Fargo (unethical marketing), Transmile, Satyam and Enron ( financial
manipulation)
 Conflicts between CEO and the Chairman
 Poor relationship between the board and shareholders e.g Sports Direct
 Inappropriate remuneration e.g Enron
 Environment disasters led to public distrust e.g BP Deepwater Horizon
 Public reprimand or fines by regulators.
3. Excessive regulations

 The government’s response to corporate scandals is to tighten and increase

regulations.
 Additional regulations increase compliance cost and promote tick – box
approach.
 Corporations go for delisting to avoid compliance burden and cost.
 Examples: Sarbanes – Oxley Act 2002, mandatory disclosure of senior
executive remuneration.
4. Lack of investment in capital markets

 Investors have lack of confidence on the integrity of listed corporations

 They feel investment is unsafe due to lack of trust on the board or senior
management.
 They retract investment or reluctance to invest in capital markets.
5. Rise of shareholders’ watchdog group

 To intensify external monitoring of corporations

 To give voice to minority or institutional shareholders
 Examples: Minority Shareholders Watchdog Group (MSWG) and CaLPERS
 Institutional shareholders hold substantial ownership – prefer “voice” to
“exit”

6. Difficulty to raise capital

 New capital needed to support growth or expansion strategy

 Investors have lack of confidence to invest in companies with poor CG
 Motive of investment and financing may be questionable.