Corporate governance is the set of rules, practices, and management practices that govern corporate management, the board of directors, and shareholders of a company and can have an effect on shareholder value.
Shareholder value is not a new idea and it entails a shift in control over businesses with far-reaching macro-economic consequences. With the growing globalization of business and the financial markets, shareholder value has become an increasingly important concern of corporates and firms.
Good corporate governance can have a positive impact on shareholder value and enhance corporate performance by promoting transparency, accountability, alignment of interests between the board of directors, management, and shareholders. This can lead to effective decision-making that can prevent corporate scandals, fraud, and issues pertaining to corporate liability which ensures shareholders’ investments are less susceptible to system risks and increase shareholder confidence in the company or corporation.
Some specific examples of how good corporate governance can affect shareholder value include:
- Ensuring that the board of directors is independent and has the right/appropriate skill set and experiences to oversee management and make strategic decisions. A significant body of research has shown that independent boards are positively associated with better corporate performance, including shareholder returns.
- Establishing clear lines of responsibility and decision-making authority within the company to prevent fraud and mismanagement. This can be achieved through mechanisms such as performance-based compensation for executives and linking pay to stock performance. When management has a financial stake in the company, they are more likely to make decisions that are in the best interests of shareholders which in turn increases and creates additional investor value.
- Setting up an effective system of internal controls and risk management to protect the company or corporation’s brand and reputation. This can increase investor confidence and ultimately lead to a higher share price.
- Having transparent and effective communication between the company and shareholders, including regular financial reporting and disclosures.
However, it is important to note that corporate governance is multi-faceted and is one of the many factors that can impact shareholder value and the relationship between the two is not always clear cut.
Also, a good governance structure does not guarantee better performance, but it creates a better environment for the company to excel. Other factors like economic conditions, market trends, and the industry of the company also play a role.
