Corporate Governance

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The global and regional importance of Corporate Governance 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 Corporate Governance attracts investment, it should not be the only reason for implementing governance practices.

At JIoD we believe that Corporate Governance can only add value if the organization truly believes in the importance of accountability, transparency and effective communication. The starting point for implementing effective Corporate Governance is understanding what it is:

“Corporate governance is the system by which companies are directed and controlled”
Cadbury Code 1992

AND

“Corporate governance refers to the structures and processes for the direction and control of companies”
IFC Definition

In other words, Corporate Governance directs the relationship primarily between shareholders, directors and managers, and secondarily within the organization i.e. between all its departments, ensuring that each relationship is accountable, transparent and fair, while maximizing value to all concerned.

While there are many benefits to effective Corporate Governance, in short 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 Corporate Governance is a logical starting point to manage risk. Although no specific Corporate Governance 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 Corporate Governance 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.

Improved Sustainability

Corporate Governance helps address succession, particularly in family-owned enterprises.

The business case for Corporate Governance globally and in the region is no longer a questionable matter. Countries, regulators and organizations that have undertaken a commitment to Corporate Governance have shown steady growth, development and improvement in their performance, valuation and sustainability; accordingly, Corporate Governance has become a necessity for any organization for its survival, credit rating, borrowing needs and growth.

For more tangible business benefits, please review a more recent publication of success stories from the MENA region about the impact of corproate governance on their business.