Does corporate governance pay?
Does corporate governance pay, even if your company is not seeking outside investors? It does, especially when dealing with competitors. When I was traveling in Serbia in November, I met with some company managers who said their firms were not too worried about corporate governance.
Their firms were not looking for funding from outside investors, they said. Any growth capital they needed could come from either their own resources (i.e., retained earnings) or from bank loans. If they are not trying to lure funds from domestic or foreign investors, they said, why do they have to worry about financial transparency or upgrading their board practices?
The answer to that question is simple: their competitors will eat their lunch. There are larger, more efficient firms from all over Europe, with deeper pockets and more marketing muscle ready to snap up the Serbian companies' customers. By not upgrading their corporate governance standards, the Serbian firms are, in effect, operating with one arm tied behind their backs when they are competing with larger, better-funded rivals.
Their complacency gives their competitors a big advantage. An example of a manager of a small firm who used corporate governance to become more competitive is Mo Ibrahim, founder of Celtel. Instead of hiring family members or close friends, Mo employed the best managers he could find in the market. He also instituted an impartial board of directors who would tell him what they really thought about his decisions. Mo's decision to use good corporate governance practices worked—he recently sold the company for $4 billion.
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I agree with you in beliving in corp. gov.ce as the biggest non-economic issue to consider when screening a company. Which one do you think could be the item to consider first (e.g. majority of indipendent directors) pound-by-pound (i.e. notwithstanding sector/country biases)?
Posted by: Aldo Bonati | Jan 26, 2007 3:59:05 AM
I agree it pays, actually is the best-paid business ever. The cost of poor governance is very high. Moderate level of corporate governance in developing countries, such as Kosova is a serious matter. If emerging market companies cannot attract equity capital, they are doomed to remain on a small and inefficient. If small businesses struggle to grow, so will poor countries. If the corporate governance in one state is poor the capital will flow elsewhere. In emerging markets and Kosovo is increasingly competing for global capital, it is evident that capital will flow to markets that are better regulated and observe higher standards of transparency, efficiency and integrity. Therefore raising and improving the standards of good corporate governance is extremely relevant and important for all companies and states, it pays off categorically.
Posted by: Bajram Krasniqi | Feb 21, 2007 9:56:26 AM
The more complicated issue is how it applies to firms owned by the State operating in a regulated/non-competitive business. Most Corporate Governance work/theories/studies/research/donor reports etc applies only to commercial private or listed companies operating in "competitive" markets(in spite of the throwaway caveat that nonlisted companies should also pay heed to their research etc). Where is the Corp Gov pressure on SOE managers who can't be taken over, can't go bankrupt and don't face competitive rivals?
Posted by: Sams | Mar 15, 2007 6:25:15 AM
Aldo: it's the majority of independent directors, of course, because they provide continuity for the organization by setting up a corporation or legal existence. However I believe that a board with a majority of independent directors and whose main committees are staffed with independent directors are better positioned to critically evaluate management and corporate performance.
Posted by: Bajram Krasniqi | Oct 23, 2007 4:53:55 AM