Why You Can't Ignore Corporate Governance

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It doesn't matter if you are an investor, a shareholder, or a visionary entrepreneur. Corporate governance matters. While this topic is perhaps not the most sexy, in reality it is the flip-side of corporate scandal, the admittedlyjuicier topic. Except no one wants to be on that flip-side. Say the names Enron or Bernie Madoff and suddenly the story gets much more interesting.

For too long now, corporate governance has been viewed as something to worry about during an event. An audit. An acquisition. A merger. A round of funding. Let's be honest, though. If your company does not have a culture of good corporate governance, it can't be manufactured over night. So here are the reasons you can't ignore corporate governance in the day-to-day operations of your business.

Corporate governance affects the decision to invest

Believe it or not, corporate governance matters to your investors in some cases as much or more than your financial standing. A McKinsey's international study from 2002 showed that a majority of investors surveyed weighted good governance as heavily or more than financial integrity in the decision to invest. Investors further admitted that they would likely avoid companies with poor governance altogether. In fact, one investor in a multi-billion dollar private equity fund went so far as to say, "Our investment group would never approve an investment in a company with bad governance."

Corporate governance affects your value

In that same survey, an overwhelming majority of investors agreed that they would pay a premium for a company with good governance. Think about that. Governing your company well actually translates into a higher enterprise value. Suddenly corporate governance is starting to sound a whole lot more slick.

Of course, this begs the question WHY? Why would investors value your company higher simply because your company was transparent and honest and fairly run? The reason is that the market still values honesty. Companies are ruined by corporate scandal, and studies have shown that investors who sell stock in companies with poor governance practices and then buy from companies with stronger practices earn returns as high as 8.5% (Corporate Governance and Equity Prices)

Do you find these statistics surprising? Why do you think investors and the market value good corporate governance over bad? Stay tuned for a follow-up post about what exactly constitutes good governance.