4 Consequences of Poor Corporate Governance

The reputation and public image of a company, especially in our current digital era, are continuously being nurtured with increased caution. From diminishing a company’s stock value, to losing stakeholder trust and confidence, poor corporate governance and negative perceptions towards a brand can lead to devastating consequences for any company.

In this blog, we provide a comprehensive list of the most common consequences to a business as a result of poor corporate governance.

But first, what is Corporate Governance?

While corporate governance is present and vital for many companies around the world, it’s important to understand its significance, while recognising any consequences that may be imposed on a company as a result of poor corporate governance. Essentially, corporate governance refers to a system of rules, practices and processes through which a company is directed and controlled, while identifying who has power and decision-making capabilities, as well as recognising who also holds accountability within the company. 

Through the operations of corporate governance, managements and boards of directors can effectively deal with the challenges of running a business, along with ensuring that their company has the relevant decision-making processes and controls in place to balance the interests of all its stakeholders, which include employees, suppliers, customers and the community. 

Ultimately, corporate governance aims to establish the most effective processes and controls that will enable the company to achieve its objectives as well as ensuring that stakeholders are comfortable and confident that their trust in a company is well founded. So, it’s no surprise why such importance is placed in establishing strong and clear corporate governance. 

That said, what could the consequences of poor corporate governance be?

1) Loss of shareholder trust & confidence 

Corporate governance establishes a company’s strategy and its objectives. Therefore, every time a company deviates from its strategy, it can weaken stakeholders' trust and the confidence they placed in that company, as it indirectly sends them a message that the company cannot be trusted. As a result, stakeholders can feel misled and cheated, leaving them looking for a way to exit the company.

Oftentimes, this can have further consequences, with investors and shareholders beginning to sell company stocks if they feel that poor business decisions are in a company's immediate future, in order to avoid any potential loss. This can start a domino effect of devastating consequences for the company, resulting in its stock prices falling and its overall value slowly diminishing.

2) Difficulty raising capital

As mentioned above, a company’s falling stock values can create a domino effect with further consequences threatening the business’s future, one of which can be difficulty in raising the company’s capital. This can partly be a result of negative perception the company created following its lack of adherence to its own corporate government strategy and controls. 

It’s important to note that, for investors, the correct implementation of corporate governance principles, such as the public disclosure of information like the protection of shareholder rights, and a company’s profitability, are some of the most significant things they look for before making an investment. This is because such factors ensure return on their investment. 

Subsequently, future investors may become fearful of investing in the company, as low stock values and lack of adequate corporate governance often signifies a greater possibility of risk, and ultimately loss.  

3) No risk management

By not adhering to its corporate government policy, a business can end up with a lack of risk management. Eventually, this may result in greater probability of the company making poor decisions and investments, along with putting at risk its ability to repay its own creditors. Examples of poor risk management, include: 

• Poor governance and insufficiency in the Organisation’s ‘Tone’.
• Reckless risk taking.
• Non-existent, inefficient or ineffective risk assessment.
• Non-integration of risk management with strategy leading to unrealistic strategic objectives.

In the long run, this can cause a ripple effect of credit defaults which may paralyse the corporation itself, along with damaging other businesses, in different industries, with investments tied to the floundering company.

4) Increased government oversight 

Any company that holds a reputation of not complying with its corporate government policies runs the risk of increased government oversight, in an effort to verify whether the company’s operations are maintained within the bounds of the law. Usually government oversight will involve regular reviews of the business’s practices, including:

• Employee pay and relations
• The impact of the business’s practices on the environment, 
• The legality of all investments made by the company, and 
• The honest reporting of all company profits, debts and losses.

If a company is found to be in violation of any of the above mentioned government regulations, then it will have to face fines, and in some instances, criminal penalties, particularly the company’s board and executives. Along with that, the company has now been placed in the spotlight if anything was to ever go wrong again as a result of this.

Takeaway

With great significance attributed to a company’s reputation and credibility, for a company to be successful, establishing an effective corporate governance strategy proves extremely effective, especially in the long run when they exhibit concrete values and practices that have been adopted by the business.

When practised correctly, this can lead to increased trust and confidence within the company amongst its stakeholders, while enabling future investments to take place without any concern or doubt.

In other words, everyone wins.

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