By Tomas Muller – Tomas.Muller@EthicalBoardroom.com
New corporate governance practices are being rolled out across the globe and existing practices are being developed. In some countries and industries in the past, corporate governance standards have been perceived to be inadequate and weak. However, with the changes in regulations and standards over the last few years corporations are concerned that amended governance measures are forcing companies to increase spending substantially in their attempts to improve compliance and build investor confidence. In the past major investors would limit their risks of investment in a corporation by exerting a degree of power and control through voting on critical decision making as well as communication through a well established relationship and network to board members. However, small investors were left relatively powerless; having inadequate resources and expertise to exert the same control. Small investors in general make investments based on the trust and faith that suitable corporate governance standards are in place. The post-crisis climate has investor faith and confidence at the lowest levels on record and securities regulators across the globe have reviewed relevant corporate governance requirements and implemented a number of reforms.
Evidence to date has suggested that recent reforms have not been overly costly and unnecessarily over-reactive. In fact, consensus is showing that the changes are doing a good job of countering the risks posed to the global economy by a lack of investor confidence. The damage to investor confidence in the US caused by the 1929 market crash took decades to repair, despite the US Congress enacting four major pieces of securities legislation as well as creating a federal securities regulator (the Securities and Exchange Commission) for the first time. Comparatively, this indicates that the changes taking place currently and their commensurate results are positive and the gains are favourably proportionate to the cost. The costs associated with the requirements of the Sarbanes Oxley legislation of the last few years are a mere fraction of the potential costs of raising capital in a market where investors lack confidence to provide liquidity to the marketplace. The corporate governance changes may be a burden initially to get in place but investors need to have faith in corporate governance standards and financial statements to keep the economy moving forward. The cost of not doing this is much greater.
However, corporations are also seeing a counterintuitive impact in their financing abilities with the changes in governance regulations – some enterprises that have demonstrated a lesser level of active corporate procedures in place may be charged a higher rate for capital than those companies that do have more formal corporate governance frameworks in place. This is in effect imposing another cost to some enterprises through increasing the cost of financing to them – and this can lead to a broader cost to the economy in terms of foregone opportunities and growth, consequential job losses and so forth.
Corporations must endeavour to improve in this area through a combination of setting up the proper mechanisms, applying the proper implementation of standards as well as a carrying out a public demonstration of a commitment to strong internal controls and high standards. This will be key to successfully regaining investor confidence and for the corporations to get a proper return of their investment in corporate governance costs. Good corporate governance standards must further be supported and made credible by government and private-sector support and enforcement mechanisms. Corporate governance approaches may differ across the globe. However, in general the central elements of good corporate governance remain widely accepted – such as a strong, competent, independent board of directors, proper adherence to corporation laws and regulations designed to protect the rights of shareholders and proper following of extensive public disclosure requirements. The price of top quality corporate governance, whether that required by Sarbanes-Oxley in the US or through the geographical requirements being set up in Europe and across the globe, is well worth paying if executed correctly and to a full and proper extent.
Accreditation Photo – Jason Matias