Why Is Corporate Governance important?
Numerous studies conclude that well-governed companies worldwide perform better in commercial terms. Adopting best corporate governance practices provides:
- Improved access to external financing;
- Lower cost of capital;
- Improved operational performance;
- Higher company valuation and share performance;
- Reduced risk of corporate crises and scandals.
Improved access to external financing
Countries with good corporate governance systems have better access to external financing. The reason: good corporate governance systems attract investment from global investors, which subsequently leads to greater efficiencies in the financial sector.
Lower cost of capital
Investors who are provided with high levels of disclosure by well-governed companies are likely to provide capital to those companies at lower costs. This reflects the investors’ improved knowledge of the company’s strategy and expected future performance.
Improved operational performance
Sustainable wealth creation within the private sector can only be achieved through good management, entrepreneurship, innovation, and better allocation of resources. Effective corporate governance adds value by improving companies’ performance through more efficient management and better asset allocation.
Higher company valuation and share performance
Many researchers have identified the existence of a “corporate governance premium” (e.g., an additional price that investors will pay for shares in well-governed companies). In addition, some researchers have identified superior share performance by well-governed companies.
Reduced risk of corporate crises and scandals
A company with good corporate governance practices will, by definition, have a better risk management system, which is more likely to cope with corporate crises and scandals, than those without.
Source: IFC/Global Corporate Governance Forum, Board Leadership toolkit