Corporate governance establishes the system of rules, practices, and processes that direct and control a company. When these systems fail, the consequences can be severe and far-reaching, affecting the company’s financial performance, as well as, the employee and stakeholder satisfaction. In this article, we will examine the cost of poor corporate governance in these three areas.
Summary
This article discusses how poor corporate governance impacts financial performance, employee and stakeholder satisfaction. Poor corporate governance can increase the risk of financial mismanagement and poor decision-making, leading to lower profits and weaker financial positions. Companies must prioritize good governance practices to avoid these negative effects. Overall, conducting evaluations on corporate governance can help organizations improve their governance practices and increase their overall effectiveness.
Financial Performance
Poor corporate governance increases the risk of financial mismanagement and poor decision making. This may lead to lower profits and a weaker financial position for the company. A study by the World Bank found that well governed companies had lower financial and non-financial risks as well as higher shareholder returns. Another study showed that the best-in-class companies on average had 8,5% higher shareholder returns.
As a listed company, poor governance can cause a decline in the company’s stock price and make it harder for the company to raise capital or make investments. In addition, companies with poor corporate governance may be at a higher risk of fraud and financial scandals. A study by PwC found that companies with poor governance were nearly three times as likely to experience fraud.
Employee Satisfaction
Poor corporate governance can also harm employee satisfaction. Employees may lack trust in the leadership and decision-making processes. The lack of trust leads to a lack of motivation and engagement among employees, resulting in high turnover and difficulty in attracting and retaining top talent. Furthermore, employees may feel their concerns are not being heard or acted upon, creating a sense of frustration, leading to lower job satisfaction and lower productivity.
Stakeholder Satisfaction
Poor corporate governance negatively affects stakeholders, including shareholders, customers, and the wider community. First, shareholders may see the value of their investment decline as a result of poor financial performance. Second, customers may lose faith in the company due to ethical or legal controversies stemming from poor governance. Last, poor corporate governance can lead to negative social and environmental impacts, damaging the company’s reputation and relationships with stakeholders.
In conclusion, poor corporate governance can have a detrimental effect on a company’s financial performance, employee satisfaction, and stakeholder satisfaction. To avoid these negative effects, companies must prioritize good governance practices. Effective corporate governance ensures that companies make sound decisions that benefit all stakeholders, not just a select few. Companies that invest in strong governance will enjoy better financial performance, increased employee satisfaction, and improved relationships with stakeholders.
First steps toward sound governance
The first steps towards sound corporate governance include establishing a clear and effective system of decision-making, creating a code of conduct for all stakeholders, implementing transparent financial reporting practices, and establishing an independent board of directors or oversight committee. Additionally, it is important to establish clear lines of communication between the board, management, and shareholders, and to establish policies that promote ethical behavior and compliance with laws and regulations.
And how do you start taking these steps?
A natural starting point is to assess the current state of corporate governance. A way to do this is by conducting evaluations. An evaluation can give comprehensive information which lays ground for future efforts. Conducting evaluations of corporate governance can also help improve performance in several ways:
- Identify areas for improvement: Evaluations can help identify areas where the current governance structure or practices may be falling short, such as lack of transparency or ineffective decision-making processes.
- Increase accountability: Regular evaluations can hold stakeholders accountable for their actions and decisions, leading to better governance practices.
- Enhance transparency: Evaluations can provide insight into the inner workings of the organization, increasing transparency and trust among stakeholders.
- Improve communication: Evaluations can help identify communication gaps or issues and provide opportunities for stakeholders to provide feedback on governance practices.
- Benchmarking: Evaluations can also be used to compare the organization’s governance practices with industry standards or best practices, allowing the company to see how they measure up and identify areas for improvement.
- Compliance: Evaluation can ensure that the company is following the laws and regulations related to corporate governance.
Overall, conducting evaluations on corporate governance can help organizations improve their governance practices and increase their overall effectiveness.
How we can help
If you want to avoid the pain points discussed above in your company, a good start is by evaluating the current state of the corporate governance. We offer evaluations for the board of directors (Board@Work), the CEO (CEO@Work) and the management team (Management@Work). These evaluations will help elevate the corporate governance by illuminating areas of improvement.
If you want to know more about how we can help feel free to contact us!