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Why companies should care about good governance



April 11, 2024

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“People don’t tend to care about governance until it goes wrong."
That’s a line we frequently use in our meetings with clients when discussing why investors should think about corporate governance. We describe it as the oil in the engine without which the car won’t be able to start. I prefer a football analogy. Governance is the goalkeeper; you can talk about the centrality to ESG of climate (the striker, let’s say) or human rights (the midfield), but if you have a hopeless and disorganised goalie, everyone else’s efforts are wasted, and you’ll concede more than your fair share of own goals.
With the questionable analogies out the way, the importance of good corporate governance cannot be underplayed. History is littered with examples of corporate governance failures and the significant impact it has on a company’s performance, valuation and reputation. Think of the Volkswagen emissions scandal, the BP oil spill, Patisserie Valerie’s auditing controversy or Boohoo Group’s modern slavery incident. Although we recognise that in all these cases, a number of factors combined to produce a serious corporate ESG failing, there is an argument that a stronger focus on governance could have led to significantly better outcomes.
Some people agree with this reasoning but think corporate governance is only a fit talking point for the boardrooms of larger listed companies. Why should a smaller listed company be interested in governance?
From a company perspective, stronger corporate governance – as we have alluded to above - allows companies to mitigate ESG risks better by building robust risk management processes and controls. But having good corporate governance structures and practices isn’t just about ESG risk management. It can produce positives as well as prevent negatives. Strong governance can make companies more attractive places to work, entice outside expertise and build more effective supply chains. It strengthens a company’s reputation and ensure long-term sustainable growth. All of these positives are crucial to attracting investor funding.
Let’s look at this a little further from an investor perspective. Investors are increasingly on the lookout for companies demonstrating good corporate governance traits that help deliver long-term value for shareholders. That means a well-functioning board that has the right checks and balances to ensure better decision-making, is sufficiently diverse to bring different perspectives to the boardroom and is led by an independent chair who is accountable to shareholders. Investors are also keen that boards don’t fall asleep on pay. They want pay arrangements that encourage the right sort of long-term behaviour. Companies displaying these corporate governance features represent more attractive investment opportunities.
Recent changes to the QCA Corporate Governance Code have brought an added layer of scrutiny to companies’ governance practices. These include new provisions for annual director re-election, giving shareholders an annual Say on Pay vote and improving the independence of important board committees The revised code comes into effect from 1 April 2024 onwards – the exact date depends on each company’s financial year – with the first disclosures expected in 2025. The earlier a smaller company begins to look at corporate governance, the easier implementation will be and the faster each company can reap the benefits.
This is where an entity like Aquis Stock Exchange comes in. For those companies keen to show off their governance credentials and to attract investor interest, the exchange allows for flexibility compared to stricter premium listing rules. But at the same time, it maintains a crucial emphasis on the importance of corporate governance, with companies seeking to list expected to demonstrate sufficient controls and processes to help the business scale up and grow in a sustainable way.
I can’t resist ending with a return to the sporting simile. Like the understated goalkeeper that rarely gets the glory but who shores up the defence and enables the midfield and attack to flourish, good corporate governance provides confidence and value to the wider business, shareholders and other stakeholders. That makes it key to attracting investment!
Archie Pearson is the ESG & Stewardship Analyst at Rathbones Investment Management
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