Studies show the benefits make for stronger companies and economies, and enable countries to withstand crises
The economy has been particularly hard hit by our response to the Covid-19 pandemic. As the dust begins to settle, business and the government are moving (with varying degrees of urgency) to set their organisations and the economy on the road to recovery. One effective weapon we have in our armoury should not be ignored: corporate governance.
A 2018 article by the International Finance Corporation’s corporate governance lead for Europe and Central Asia, Merima Zupcevic Buzadzic, lists ways in which corporate governance can help countries out of a crisis. She argued that corporate governance creates the framework to enable economies to recover from wars or economic meltdown. Buzadzic also made the important point that a commitment to corporate governance sends a powerful message to a demoralised country and the outside world.
Locally, the past decade and more have provided a graphic illustration of what happens when a country’s leadership is not focused on realising desirable goals. If the governing party had adopted the King IV principles, I venture to suggest that the president would not have had to pen that now infamous seven-page warning letter to his own party, but would rather be in the enviable position of detailing how well the country was rising to the challenge of reconstructing an inclusive and vibrant economy.
SA has a solid base when it comes to corporate governance (albeit not always pervasively and effectively applied in everyday practices). Our King reports have received worldwide recognition, and their various iterations chart the move away from a primitive compliance mindset to one focused on how ethical and effective leadership by the board and other governing bodies can achieve clearly defined outcomes, among them ethical culture, good performance, effective control and legitimacy.
Organisation for Economic Co-operation and Development (OECD) research shows that capital markets favour companies and countries where corporate governance is strong. Capital is highly mobile, and it favours well-governed markets. As former US Securities and Exchange Commission chair Arthur Levitt said: “If a country does not have a reputation for strong governance, capital flows elsewhere.” When it comes to capital, the destinies of companies and the countries in which they operate are thus intertwined.
Studies in the US, summarised in an article by Jay Eisenhofer entitled “Does corporate governance matter to investment returns?”, found that “the quality of a particular company’s governance practices and procedures positively correlates with both good corporate financial performance and shareholder value. Simply put, good corporate governance does in fact pay.”
A local study by Isaih Dzingai and Michael Bamidele Fakoya on the “Effect of corporate governance structure on the financial performance of JSE-listed mining firms” concluded that if mining companies comply with corporate governance codes they, as well as the economy as a whole, will benefit.
An OECD study in Latin America, a geography with many similarities to ours, looked at a wider group of companies and drew similar conclusions. Well-governed companies across various sectors and countries produced better operational and market results than their peers, “reflected in higher levels of profitability, relative share prices and liquidity, and reduced cost of capital”.
Corporate governance not only helps firms outperform when markets are good; it also helps them better weather the consequences of an economic downturn, as demonstrated during the 2008 financial crisis. On December 31 2008, shares in well-governed companies bought in 1997 were worth five times a similar investment in the broad Latin American stock market.
Overall, companies with a strong commitment to corporate governance saw the market reward them with an average 8% increase in market value when communicating improvements in their corporate governance structures and processes.
“The definition of a successful company, and as true for countries, is one that develops a corporate soul — not just a group of people gathered together for a joint commercial purpose,” says Bidvest chair Bonang Mohale. “This is much more than the sum of its many and varied parts. It is the ethos that drives it and makes it special. This requires not only doing right by the business, but also the societies in which it operates.”
The tangible benefits of corporate governance are complemented by a greatly reduced risk from reputational damage, and position the company to deliver positive results to its stakeholders and society more broadly. The same could be said of the country, with whose fortunes all of us are completely aligned.