With the rise of ‘start-up culture’, there has been much fascination with charismatic founders who seek to revolutionize and disrupt industries with their innovative products and services. It can be easy for prospective investors to get caught up in the vison, charisma and hype surrounding these founders and their businesses. However, high profile failures such as WeWork and Theranos illustrate the dangers of placing too much reliance on the vision and charisma of a singular founder and not enough on strong corporate governance as the backbone of a successful, stable business.
The dangers of poor corporate governance are not new and were illustrated in past decades with the failure of Enron and WorldCom. The failure of these companies, while to the detriment of its stakeholders, have taught us lessons that underpin the importance of good corporate governance in a company. Based on these implications it is safe to say that a company’s corporate governance is critical to its long-term growth and success.
Therefore, corporate governance plays a pivotal role where investors are concerned. As such, good corporate governance is particularly important for companies who are looking to attract investors and for investors looking to invest in a company.
What is Corporate Governance?
Corporate governance is the system by which companies are directed and controlled. This includes the set of rules, controls, policies and practices that dictate how a company’s board of directors manages and oversees the operations of a company. Good corporate governance includes the basic principles of accountability, transparency, fairness and responsibility. As such, an effective system of corporate governance ensures that companies have the appropriate decision-making processes and controls in place so that the interests of all stakeholders (shareholders, senior management, employees, suppliers, customers and the community) are balanced.
Additionally, corporate governance provides a framework for attaining a company’s objectives by incorporating many aspects of a company’s management. This may include a company’s action plans or general strategies, internal controls, performance measurement and corporate disclosure practices. Consequently, a company’s corporate governance is important to investors as it shows a company’s direction and business integrity. Good corporate governance therefore helps companies to build trust with investors and the wider community. As such, corporate governance helps to promote financial viability by creating long-term investment opportunities for investors.
Corporate Governance and the Board of Directors
The Board of Directors of a company play a pivotal role in implementing good corporate governance practices. The Board is responsible for ensuring that the company’s corporate governance policies incorporate the business strategy, risk management, accountability, transparency and ethical business practices required to effectively run a company.
Furthermore, the Board owes a fiduciary duty to the company. As such, directors are required by law to act honestly, and in good faith with a view to the best interests of the company. This duty must be exercised with the care, diligence and skill of a reasonably prudent person in comparable circumstances. As such, the Board is responsible for making decisions which are in the best interest of the company and can be checked and balanced in the future.
The Board should possess the competencies and expertise necessary to ensure the proper implementation and execution of such policies and should comprise of both executive and non-executive directors who assist in the decision making of the company. This improves the corporate credibility and governance standards where a company’s decisions are concerned.
Factors to Consider When Investing
Based on the discussion above, it is evident that good corporate governance matters when investing. As an investor, you want to ensure that the company that you are investing in practices good corporate governance in order to avoid potential losses and to maximise your chances of securing a return on your investment. To do this, there are certain areas that an investor can focus on to determine whether a company is practicing good corporate governance or not, including the company’s:
- Disclosure practices;
- Risk management practices; and
- Policies and procedures on reconciling conflicts of interest
Disclosure refers to the timely release of information about a company that may influence an investor’s decision, this includes a company’s audited financial statements, annual reports and any other material information relating to the business and affairs of the company which may have a significant impact on the market price or value of the shares of a company.
Risk Management Practices
The risk management practices of a company are also important as they seek to identify, monitor and manage potential risks in order to mitigate the impact these risks may have on the profitability of a company. As such, effective risk management practices help to protect the financial health of a company and the viability of your investment.
Policies and Procedures on Reconciling Conflicts of Interest
Lastly, companies and their Boards must adopt policies and procedures to limit, manage and disclose any conflicts of interest that may affect their decisions and their fiduciary duties to their shareholders. This is imperative in order to ensure proper governance and to mitigate any losses that may result from poor decision making that may have a negative impact your investment.
In closing, investors are encouraged to do their own due diligence when deciding to invest. Based on the corporate governance failures of the past and the recent failures among entrepreneurs and start-ups, it is apparent that the principle remains – Good corporate governance matters when investing. Consequently, as an investor it is important to ensure that the company you are investing in has good corporate governance and that there are checks and balances in place to safeguard your investment.