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SMES CORPORATE GOVERNANCE

Winning Investors through Corporate Governance

 Article: Nazih Hisham Al-Naser - ICD 

"Companies with sound corporate governance usually perform better than other companies. Good corporate governance results in better access to external capital, lower financing costs, higher credit ratings and strong investor confidence.” 1

When investors examine the fundamentals of a business, one of the key items they pay close attention to is the manner in which the business is governed.

Indeed, research has shown that companies with better governance practices are able to attract and retain investors. According to an IFC report, 2 over 1000 investment firms and private equity funds surveyed globally indicated that corporate governance is a critical factor when making investment decisions and no investor will put money into a company with poor governance.  

Corporate governance has a triple effect in making your SME attractive to investors.

  1. First, better corporate governance increases the market valuation of your SME. “Three Surveys on Corporate Governance” published by Mckinsey & Company3, found that investors are willing to pay 28% more for a company with good governance structure than they would pay for a company without.

This is because strong governance practices maximize investor returns. It provides a solid foundation that protects the misuse of funds by establishing better monitoring systems that prevent mismanagement by self-serving managers or controlling shareholders. Such controls gives investors the confidence that the money will be used as intended, their investment is well protected and there is guaranteed future cash flow in form of dividends or interest.

  1. Secondly, high standards of corporate governance results in lower cost of obtaining equity capital or debt. A weakly governed SME, is perceived as a high risk investment. The higher the risk, the higher the rate of return on capital demanded by investors.

When your business is able to obtain capital at a lower cost, it means it will have more access to funds which will result in more expansion and consequently better realized return for potential investors.

  1. Thirdly, well governed companies offer a profitable exit strategy. A company with proper corporate governance practices will have better financial management and higher profits. This results in higher share value which directly translates to better capital gain for an investor upon disposal.

 

References:

  1. PwC and The Pearl Initiative: “Governance Practices in GCC Family Firms,” access through: https://www.pwc.com/m1/en/publications/documents/pipwc-report.pdf
  1. IFC: “Corporate Governance Matters to Investors in Emerging Market Companies,” access through:https://www.ifc.org/wps/wcm/connect/dbfd8b004afe7d69bcb6bdb94e6f4d75/IFC_EMI_Survey_web.pdf?MOD=AJPERES
  1. Paul Coombes and Mark Watson: “Three Surveys on Corporate Governance,” Mckinsey Quarterly, Special Edition. Access through: http://www.qualified-audit-partners.be/user_files/ITforBoards/GVCR_McKinsey-Coombes_Paul___Watson_Mark_Three_surveys_on_corporate_governance_2000.pdf
  1. Holly J. Gregory: “The Globalisation of Corporate Governance,” Weil, Gotshal & Manges LLP access through:http://people.stern.nyu.edu/adamodar/pdfiles/articles/globalisation_of_corporate_governance.pdf