FleishmanHillard Thought Leadership

Scoring the governance goal

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Ruby Yim outlines the growing importance of corporate governance as a value proposition among the global investment community

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1. What is driving the rise in the importance of corporate governance?

Corporate governance is defined in legal terms as “the system by which companies are directed and controlled” (Cadbury Committee, 1992) and involves a set of relationships between a company’s stakeholders. This includes the shareholders, directors, management and other stakeholders as defined by its corporate charter, bylaws, formal policies and the law.

An important theme of corporate governance is the nature and extent of accountability, and mechanisms that try to decrease the principal–agent problem (for example, when the hiring of a top executive for a corporation involves issues such as conflict of interest).

Corporate governance also includes the relationships between the stakeholders involved and the goals towards which the corporation is governed. It ensures that an enterprise is directed and controlled in a responsible, professional, and transparent manner with the primary purpose of safeguarding its long-term success.  Its aim is to increase the confidence of shareholders and capital-market investors.

There has been a resurgence of interest in the corporate governance practices of modern corporations since 2001, particularly due to the high-profile collapses of a number of large corporations, such as Enron Corporation and MCI Inc. (formerly WorldCom), most of which were involved in accounting fraud. Corporate scandals of various forms have maintained public and political interest in the regulation of corporate governance.

Many surveys have shown that investors are willing to pay more for companies with good governance, and according to a McKinsey survey of global investors, about 66% of investors responded accordingly.

In contrast, the increasingly particular nature of investors and the stringent demands of capital markets mean that corporations are sharpening their focus on corporate governance to address market needs.

2. Do Asian companies understand and sufficiently appreciate corporate governance or corporate stakeholder engagement?

Company law and corporate governance, sometimes seen as difficult or absurd concepts, are relatively new to Asia, where many corporations are family owned. Even for public companies, accountability issues are not uncommon as ownership and management roles are shared.

Furthermore, when stakeholders’ interests are divided, decisions made by a company may often skew towards certain groups of stakeholders. There is still a considerable way to go to improve levels of corporate governance levels in the region.

3. Many companies still seek to conform with minimum compliance. How important is it that they are now seen to go the extra mile and develop corporate governance values throughout the business?

Surveys indicate that investors are willing to pay more for a well-governed company, and a growing number of market participants recognise the importance of good corporate governance. For instance, last year FTSE launched their Global Sustainability Index Series, a broadly diversified global benchmark based on environmental, social, and governance (ESG) rankings. The launch of this index is in itself recognition of sustainability, with governance as an important component.

For investment products, performance benchmarking and asset allocation, inclusion in this index means a more rounded exposure to investors who use such benchmarking tools.
It is common for listed companies in the region to continue conforming with minimum compliance. However, with heightened interaction between issuers, capital markets, the globalisation of capital markets and intensified competition for capital, Asian companies will accelerate their recognition and implementation of corporate governance.

4. Does the global economic uncertainty make it more difficult to persuade corporations of the value of continued communications and to commit to comprehensive communication programmes?

It is common practice for corporations to disclose less during times of economic uncertainty and reduced market visibility. However,  NIRI research has shown that investors demand continuous disclosure and more guidance on the business, particularly in times of economic uncertainty when market visibility is low.

During recent market turbulence and short-selling, we saw a number of well-known, mature companies proactively manage their communications with investors, maintaining open communication channels through regular and frequent contact. Even though only a start, we expect the trend to continue as companies gain a deeper understanding of market sentiment and investor requirements.

5. How important is it to integrate corporate financial communications, getting corporate governance, IR, marketing, PA and communications personnel on the same page?

Corporations face a variety of external stakeholders, including shareholders, potential investors, media, consumers and regulators, whose perception of one group or reputation of one segment may affect the others. For example, a company’s valuation may reflect its success in business, with investors monitoring the execution of its business strategy including the marketing of its products. It is therefore imperative for to adopt integrated communications programmes to ensure consistent messages to all stakeholders.

We have learnt from experience that internal communications and collaboration are never as easy and smooth as expected, and inconsistent disclosures of information create confusion and misunderstanding, especially for companies dealing with many different interested parties and stakeholders. It is therefore essential to establish a one-voice system and integrated approach to ensure consistent across-the-board communications with different stakeholders. This way, companies can optimise reputation management and communication efficiency.

6.  What are the biggest hurdles to be overcome in persuading companies to adopt a more activist approach to financial and corporate communications?

Human beings tend to talk about positives and shy away from negatives.  This behaviour is often reflected in corporate conduct, leading to inconsistent disclosure. However, investors require disclosure of both good and bad information about a company, and in particular they require transparency in times of turmoil and uncertainty.

In financial communications, one of the hurdles for Asian companies is some management’s limited knowledge and understanding of capital markets. They understand their business and the interests of their customers, but sometimes capital market audience opinions go unheard.

7.  What are the specific skills sets and issues which make this sphere of communications stand out from other areas, and what upsides can effective engagement deliver?

Practitioners should be familiar with listing rules and regulations, knowledge of capital markets, investor expectations and requirements, and best practices throughout, all of which are ongoing and continually changing.

The more transparent a company, the better its governance, and the more likely it is to be rewarded with a higher valuation, and thus be more stable if the market turns volatile.

8. The value of being a good corporate citizen in the investment community is assessed by good corporate governance, and sometimes that is difficult to measure. Where does its true value lie for a company?

The values and benefits are many. Firstly, the company will gain trust and investor confidence. Secondly, the company may be better placed for attracting quality investors which could result in superior shareholder composition. Thirdly, it may command a better valuation and performance, as statistics suggest. Finally, at times of market instability or crisis, the company can maintain a stronger and more defensive position.

Ruby Yim, Senior Vice President, Partner and Co-Leader, Global Capital Markets Services

 

business business strategy Crisis ESG investment Management McKinsey sustainability

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