Question

Discuss any eight ways in which an organisation or society will benefit from good corporate governance

Answer 1

Corporate governance can be defined as the framework by which a business organization is controlled and directed in the most effective way. Corporate governance involves a set of principles for the relationships between a company’s management, its board, its shareholders and other stakeholders.

Eight benefits of good corporate governance

1. Risk mitigation

Corporate governance framework will provide aid to mitigate risks. It provides shareholders in the non-listed companies the comfort that although their exits may be difficult, their interests will be safeguarded by the board and management. It will also reflect on exit strategies, thus helping prospective shareholders to decide whether to invest in the company or not.

2. Improved capital flow

The confidence of investors and banks in the organization due to its healthy financial management reporting will improve access to capital. It will also minimise cost of capital and the cost of equity, resulting in an optimised fund flow. Transparency, especially regarding the interest to investors, will allow a lower risk premium, hence lowering the cost of capital and equity.

3. Reputational boost

Corporate governance can also boost a company's reputation. Transparency in the organization's internal policies, control mechanisms and dealings with suppliers, vendors, media, staff and government bodies will boost its reputation and thus enhance its brand value.

4. Effective decision-making

Robust corporate governance policy at action will also help in having a rapid decision-making process by establishing clear borders of roles between owners and management.

5. Improved reporting

Improved performance reporting would lead managers and owners to track the business operations effectively and thus make more informed and fact-based decisions..

6. Focus on compliance

Good corporate governance demands the company to stay compliant with local laws and regulations. For this it will have to synchronise risk management and compliance to ensure the company has proper control mechanisms. It has to meet its objectives and should operate efficiently in terms of people, processes, technology and information.

7. Higher staff retention

An increase in staff retention can be seen when the company has a well prescribed and communicated vision and direction. A focus on the company’s core business will enable it to catch the market and attract the interest of stakeholders.

8. Limitats disruptive behaviour and conflicts of interest

Having rules to reduce malpractices and fouls, the organization can bring down the volume of disruptive behaviour and fraud.