Why Good Corporate Governance Matters

January 4, 2021

Often, when looking for an investment opportunity, we all want to uncover a piece of information that indicates why a company could see huge growth in the future. It is often imagined that that piece of information is a new innovation at a company, opening up a new business somewhere or something similar. What we often overlook, at first, is starting to research companies based on good corporate governance. Indeed, while uncovering new pieces of information sounds exciting, determining how good a company’s corporate governance is sounds a little dry. However, good corporate governance is often fundamental to a company’s success. Here, in this article, we discuss why. 

What is corporate governance?

Firstly, what exactly is corporate governance? Corporate governance is an idea that can touch all aspects of a company. Broadly speaking, it is a framework that offers guidance to a company about how it should act and operate. It informs management about how it should do business and what is acceptable or not acceptable while doing business on behalf of the firm. 

What makes good corporate governance

It’s all well and good knowing what corporate governance is, but it is imperative to understand what makes good corporate governance. Without knowing what makes it good, it is difficult to identify companies that display it. Simply put, good corporate governance is when a firm has a culture of accountability and responsibility - in all that it does. It means that it does not take any unnecessary risky action and nor does it partake in corrupt activities. Good corporate governance will promote ethical and sustainable ways of working, while having robust procedures in place to unearth any fraudulent or illegal acts within the company. In fact, good corporate governance guidelines will ensure that such acts are never even close to becoming part of the business. 

Why is good corporate governance important?

Good corporate governance is important to identify within a firm as a key factor for investing as companies with good corporate governance are historically far more successful. Companies with good corporate governance also have the right processes in place to grow at a pace that is sustainable and manageable. By not only staying within the letter of the law, but also having to comply with a company’s code of ethics, good corporate governance promotes and encourages healthy ways of working, which then results in a successful company. The company is likely to be able to survive even the biggest headwinds as a result - having had to steer clear of ruthless methods of working and risky opportunities. 

Corporate governance - key takeaways

Corporate governance should always come into consideration when looking at a potential investment. The vulnerability of your investment, if the company does not have stringent corporate governance procedures in place, is that much higher than a company with a good corporate governance code. As a result, it should always be on your check list of factors to investigate before making your final trading decisions.

Rachel Lee
Having worked at Morgan Stanley and BNYMellon for over 10 years in pensions and investments, Rachel now works as a full-time business and financial writer.

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