Corporate governance refers to the system of rules, practices, and processes by which a company is directed and controlled. It includes the relationships between a company’s board of directors, management, shareholders, and other stakeholders, and includes mechanisms for decision-making, accountability, and oversight.
Good corporate governance is characterised by transparency, accountability, and ethical behaviour, and is aimed at promoting long-term success and sustainability. It involves a range of activities, such as ensuring proper financial reporting and internal controls, managing risks effectively, protecting shareholder rights, and complying with legal and regulatory requirements.
Corporate governance is important because it can impact a company’s financial performance, reputation, and ability to attract and retain investors. It also helps to ensure that companies are managed in a responsible and ethical manner, which can benefit both the company and society as a whole.
Good corporate governance is important to investors for several reasons:
- Protection of investor interests: Good corporate governance ensures that the interests of investors are protected, and that companies are run in a responsible and ethical manner. This includes transparency in financial reporting, accountability of management, and protection of shareholder rights.
- Better decision-making: Companies with good corporate governance are more likely to make sound business decisions, as they have strong internal controls and effective risk management systems in place. This reduces the likelihood of financial scandals and increases the probability of long-term success.
- Increased shareholder value: Good corporate governance practices are often associated with higher shareholder value, as they lead to better performance, increased profitability, and stronger reputation. This can attract more investors and improve the company’s access to capital.
- Mitigation of risks: Effective corporate governance helps to identify and mitigate risks that could negatively impact the company’s performance or reputation. This includes risks related to financial reporting, legal and regulatory compliance, and environmental and social responsibility.
Overall, good corporate governance is important to investors as it can enhance transparency, accountability, and sustainability, which can lead to better investment outcomes over the long-term.
It is difficult to provide a specific percentage or number on how much better companies with good corporate governance outperform those with poor corporate governance, as there are many factors that can impact a company’s performance. However, several studies have shown that companies with good corporate governance tend to have better financial performance and outperform those with poor corporate governance over the long-term.
For example, a study by MSCI found that companies with high environmental, social, and governance (ESG) ratings outperformed those with low ESG ratings by 5.4% per year over a 10-year period. Another study by Harvard Business Review found that companies with strong corporate governance outperformed those with weak governance by 17.4% over a five-year period.
Institutional investors, such as superannuation funds and other large investors, can and should play a significant role in setting corporate governance standards. They often hold large ownership stakes in companies, which gives them significant influence over corporate decision-making.
Institutional investors can use their influence to push for improved corporate governance practices, such as greater board independence, more effective risk management, and stronger shareholder rights. They may also engage in shareholder activism, which involves using their voting power to push for changes in company policies or governance structures.
Institutional investors can use their influence to encourage companies to adopt ESG policies. This can include encouraging companies to address issues such as climate change, diversity and inclusion, and labour practices.
The stock exchange also plays an important role in setting standards for reporting on corporate governance practices.
It’s worth noting that good corporate governance is just one factor that can contribute to a company’s performance, and that there are other factors, such as industry trends, competitive dynamics, and general economic conditions, that can also play a significant role. However, there is evidence to suggest that companies with good corporate governance are more likely to perform well over the long-term, which is important for investors.
PNGX recommends discussing your investment objectives and needs with a stockbroker or qualified financial adviser. In PNG, you can either contact JMP Securities Limited (enquiries@jmpmarkets.com) or Kina Securities Limited (wealth@kinabank.com.pg). The information in this article is general in nature and you should take care to inform yourself about the specific characteristics of a particular investment before making a decision to invest in it.
By following these articles and reading the information available on the PNGX website (www.pngx.com.pg) or following PNGX on LinkedIn or Facebook you can learn more and build your wealth by investing in PNG.
