Good Guys Don’t Finish Last – Why Strong Corporate Governance Builds Strong Businesses

Good corporate leaders can be significant forces for good in the world.

That might smack a little of bumper sticker wisdom or fortune cookie feel-good, but it’s also, undeniably, a statement of fact.

And it’s one that, on the surface at least, management teams are buying into in a big way.

Purpose-driven leadership – and placing equal emphasis on profit, people and planet – is the flavour of the month. A cause for optimism, right?

Maybe.

Yes, it’s encouraging to see so much noise being made about leaders pursuing loftier goals than status, money and self-indulgence. But you don’t have to dig very deep to discover that trying to live up to these ideals is putting many of today’s leaders under intense pressure.

The problem is, becoming an organisational leader doesn’t automatically make you competent at corporate governance.

Many company directors, in fact, take their place at boardroom tables without any of the practical skills or real-world know-how needed to make the kind of high-quality, ethical decisions that drive organisational success.

This needs to change.

Why?

Because there is compelling evidence that companies with strong corporate governance outperform those without.

It really is as simple as that.

This not only makes them more financially successful, it also means they’re a far more attractive option for investors and other stakeholders.

The Harvard Law School Forum on Corporate Governance, for example, mentions that 64% of investors believe weak governance and poor financial performance are the most crucial factors taken into account when making investment decisions.

This is underpinned by the UK's Wates Principles, which were introduced at the beginning of 2019. Although they’re more of a guideline instead of a legally binding framework, they are widely respected.

Essentially, they require large private companies (that meet a specific threshold) to disclose their corporate governance arrangements both in their directors' report and on their website - including whether they follow a formal code.

The key principles covered are:

1.      Board composition

2.      Director responsibilities

3.      Purpose and leadership

4.      Remuneration

5.      Opportunity and risk

6.      Stakeholder relationships and engagement

Encouragingly, we’re seeing more and more value being placed on companies’ adherence to these and other governance guidelines.

Recent research by McKinsey, as an example, indicates that governance-related demands by investors around the world have grown by a staggering 5 000% in the past 10 years. Today, around 70% of all investor demands focus on governance.

In stark contrast, bad corporate governance weakens the potential and sustainability of companies, even those with strong financial performances.

To achieve long-term success and sustainability, integrating corporate governance into the leadership structure is not just beneficial — it’s essential.

Here are just some of the benefits of strong corporate governance:

• Risk mitigation. Shareholders take comfort in the assurance that the board and management will protect their interests.
• Enhanced performance reporting. This facilitates better data- and fact-driven decisions, improves cost reduction, and delivers healthier sales margins.
• Improved capital flow. Companies with strong financial management reporting systems create greater bank and investor confidence, and a transparent capital structure means reduced risk premiums. As a result, their boards of directors have better access to capital, which reduces equity and capital costs.
• Reputational strength – studies show there is a direct correlation between implementing good corporate governance practices and increased reputation and brand value.
• Better staff retention - A well-defined company vision and direction boost employee morale and motivation, which, in turn, increases talent retention. This is becoming increasingly important because Millennials, who currently make up the largest workforce group in many countries, place a high degree of importance on a company’s commitment to responsible business practices when making a decision about where they want to work.

Top down, not bottom up

“Many of the largest corporate scandals have been due to poor governance structures.”

Irfan Patel, Corporate Governance Analyst, AXA Investment Managers.

In the same way that “a fish rots from the head” in firms where corruption and fraud are the lucrative playground of the C-suite, good corporate governance in ethically-led companies must be driven by their executive management.

Leaders need to act by example, following ethical practices and inspiring their employees to do the same.

As regular readers of my articles will know, I’m not backward about coming forward when it comes to calling out the individuals responsible for the corporate scandals that seem to happen with concerning frequency.

Sadly, as I’ve also often lamented bitterly about, incidences where corporate individuals are held accountable – and punished - for their unethical business behaviour are few and far between.

So, if justice after the fact is a rare occurrence, we’re really left with only one effective weapon in the ongoing battle against corporate fraud and corruption:

Stopping it from happening in the first place.

That means instilling a culture of ethical leadership and strong corporate governance right from the start and embedding it into the very fabric of the company culture.

I like to compare it to learning to drive. When you get behind the wheel for the first time, everything is unfamiliar, and you spend far more time looking at the gearstick than the road. But eventually, you get to the point where operating the pedals and gears is second nature. You don’t even think about the mechanics of what you’re doing, you simply drive.

This is what needs to happen with corporate governance. When it’s embedded as part of the company culture, and baked into everything it does, behaving ethically just becomes something you do without even thinking about it.

Good governance future-proofs companies

Not even the most experienced boards of directors can predict exactly what will happen in the future. The best they can do is prepare as thoroughly as possible for any uncertainty.

Good corporate governance is an excellent foundation.

When you demand uncompromised accountability from your management team and empower your employees through fair workplace practices, you not only protect your organisation against potential risk, you also minimise the impact of any negative business forces that may arise.

This means you’re better able to stay competitive, stay focused, and stay ahead of your competition.

Good guys – 1, bad guys – 0.

And that is 100% as it should be.