The Importance of Corporate Governance
The global and regional importance of Corporate Governance (“CG”) is clearly increasing; not only as a result of the financial turbulence in leading global economies, but also because of the increased focus on emerging markets. While good CG does attract investment, it should not be the only reason for implementing governance practices.
At Schema we believe that CG can only add value if the organization truly believes in the importance of accountability, transparency and effective communication.
The starting point for implementing effective CG is understanding what it is:
“Corporate governance is the system by which companies are directed and controlled”
Cadbury Code 1992
“Corporate governance refers to the structures and processes for the direction and control of companies”
In other words, CG directs the relationship primarily between shareholders, directors and management, and secondarily between the organization and all its departments, ensuring that each relationship is accountable, transparent and fair, while maximizing value to all concerned.
Based on a recent survey coordinated by the IFC in the MENA region, 50% of the businesses cited that CG is either very important or at least important.
While there are many benefits to effective CG, some of the key benefits to an organization include:
Improved Operational Performance
Emerging market companies with good governance rated 8 percent pts higher vs. peers EVA (Credit Lyonnais, 2001)
Improved Risk Management
Organizations with superior governance had much lower risk profiles (Brown, 2004). From a regional perspective, strengthening CG is a logical starting point to manage risk. Although no specific CG weakness was responsible for the financial crash that took place in 2006, it became evident that a substantial number of investors were not sufficiently informed about their holdings, and that information provided by companies was inadequate and not subject to analyst coverage. Therefore, increasing the financial literacy of investors, while improving the information flow to the investing public, quickly became key priorities of the regional authorities to manage risk. (OECD, 2010)
Higher Firm Valuation & Share Performance
Investors are willing to pay a premium of up to 40% for well-governed organizations. This willingness is also applicable from a regional perspective, as organizations with CG are targeted and hand selected by investors at a premium because of the assurance of accountability, transparency and fairness.
Better Access to Capital
There is a strong correlation between good governance and lower capital costs (Dyck & Zingales, 2004). From a regional perspective, the banking sector has traditionally acted as a principal source of corporate financing. However, the banks’ ability to satisfy the demand for corporate borrowing was hampered by their relatively risk-averse profile and the general opaqueness of corporate borrowers. The disclosure-averse culture in the region, where controlling shareholders have often been reluctant to divulge operational or financial details of their business, has contributed to the general lack of transparency in the corporate sector. The ongoing development of capital markets created a requirement for greater transparency, hence slowly, but surely, pushing disclosure and broader governance issues onto the policy agenda (OECD, 2010) creating and ensuring better access to capital throughout the economy.
CG helps address succession, particularly in family-owned enterprises.
The business case for CG globally and in the region no longer a questionable matter.
Countries, regulators and organizations that have undertaken a commitment to CG have shown steady growth, development and improvement in their performance, valuation and sustainability accordingly CG has become a necessity for any organization for its survival, credit rating, borrowing needs and growth.
Our CG services include:
- Assessing the clients’ CG status
- Establishing and implementing CG codes, models and frameworks
- Establishing policies and procedures that help create an effective governance culture
- Creating internal control systems, board policies, committee agendas, etc
- Ensuring risk management and whistle blowing strategies are effective creating the desired impact
- Acting as a board secretary integrating CG throughout the organization
- Advising family business’ on applicable governance models
- Providing capacity building with respect to CG principles
- Preparing the key reports on the CG of the organization