In this era of rapid advancement, ‘Corporate Governance’ is in the spotlight. Decades ago, when this topic came up for discussion, the board and senior personnel often underestimated its importance, and diverted their focus to revenue, operations and profits. But now, when stakeholders look at business, they see it through the lens of Corporate Governance too. While it is understood that revenue is important, governance too is now viewed to be an important aspect of a company’s being. Companies whose boards and managements take governance seriously, benefit in the long run.
Investing in Corporate Governance practices is no longer an option; it has become a key pillar of a company’s growth path. This promises sustainability, long-term growth and investors support. But, there continue to be companies that fail to understand its value, which often leads to avoidable setbacks.
Let us dive into each such category, where the journey of corporate failure begins, when governance is given short shrift.
- Operational and Financial losses – If governance standards in a company are jeopardized, making strategic decisions and ensuring timely consensus among management and directors becomes difficult. This lack of coordination and constructive debate on decisions leads to unnecessary delays, mismanagement and operational inefficiencies, which could ultimately result in financial losses for the company.
- Talent drain – Poor work culture within the organisation, owing to weak tone at the top, results in improper and unethical practices the workforce. This could result in good employees leaving the company over a period of time.
- Reputational damage – The company’s reputation is one of its most valuable intangible assets. In this age of social media, where controversy spreads faster than light, the company’s image, once tarnished, makes rebuilding trust with stakeholders a difficult and costly process.
- Litigation and Regulatory oversight – Non-compliance and poor transparency and disclosure reflects poor governance, which could attract never-ending litigation, penalties and, in some cases, imprisonment of directors, Key Managerial Personnel, and auditors of the company. On occasion, the company cannot escape these consequences merely by paying penalties. Such events bring companies under the radar of the Regulators.
- Ethical lapses – Unethical practices such as insider trading, misrepresentation of financial decisions, preferential and/or fraudulent transactions, bribery, corruption, misuse of the company’s assets, etc. are the byproducts of weak governance.
- Increased risks, including cyber-attacks – Risks are a part of all businesses. However, being aware of them and managing them proactively is what sets good companies apart. In recent times, one of the most common risks, which has caused damage, has been cyber-attacks and consequent data breaches.
- High cost of capital – Due to poor transparency and disclosures, investors hesitate to invest their money. In such cases, banks and financial institutions will lend money at very high interest rates. This will hinder the company’s expansion, as raising funds would not be easy, and would be costly.
- Decline of stock price – Investor’s confidence and their decisions with respect to investments are directly related to the governance measures followed by a company. Over time, poor governance, or episodes that reflect poor governance, result in a fall in stock prices and erosion of shareholders wealth.
- Closure of business – Persistent and cumulative governance lapses within the company push the company towards the closure of business due to lack of proper direction that a good Board could have provided.
- Systemic risk – The impact of weak governance does not remain confined within the organization in which it occurs. It creates a ripple effect, generating a problematic environment for all other parties and entities related to it.
Though these categories may seem to different, they are all interrelated. Therefore, it is imperative for any organization to invest in building a strong governance infrastructure, rather than facing severe repercussions in future. As the old saying goes, ‘Prevention is better than cure’.
Rishita Pandey
