As we know, when it’s done well, strong governance can help businesses remain competitive, compliant with regulations, and resilient during challenging times. Poor corporate governance is generally seen as a legal risk to the directors and executives, however, it also means the inverse of all the positives that come with good governance. It means a business that is not competitive, and lacks the resilience to navigate challenging times.
Furthermore, losing control over governance means eroding investor confidence, creating operational inefficiencies, and severe reputational damage in the eyes of customers and clients.
But what does that mean in practice?
Given that most businesses have an interest in either attracting new investors, or appeasing their existing ones, one of the most immediate and damaging consequences of poor corporate governance is the erosion of investor confidence.
Investors place their trust in a company’s ability to manage risk and act in the best interests of shareholders (including them personally). When governance is compromised, this trust is directly undermined.
A good example of this was the 2018 Banking Royal Commission, which exposed widespread misconduct in some of the country’s largest financial institutions. Several institutions were found to have prioritised profits over ethical practices, and for the banks, one of the biggest consequences of this was a decline in investor confidence that took a long time – and a lot of very expensive compliance work – to reverse. The long-term effects are still being felt today, and given the pressures the Australian banking sector is facing from digital disruption and innovation, the extra effort to keep investors on board is making staying competitive more difficult than it should be, given that Australia’s banks are otherwise typically healthy.
Poor governance does affect day-to-day operations. Weak decision-making frameworks and a lack of accountability often result in inefficiencies that can drag down a business’s performance.
What often happens is that with poor governance in place, managers and executives can make uninformed or risky decisions that lead to costly operational mistakes. Poor governance frameworks also mean that the traditional checks and balances aren’t in place either, and boards may lack the necessary independence or expertise to properly scrutinise the actions of executives. Without proper checks and balances, businesses are prone to any number of issues including but not limited to inefficiency, duplication of efforts, and wasted resources.
Poor corporate governance exposes businesses to increased legal and financial risks. Noting this isn’t reinventing the wheel or providing you with anything you didn’t know, but it’s worth repeating because it’s so critical to the health of a business. The legal consequences of governance failures tend to be the scariest (for those that would be accountable), but the fines, litigation and even penalties that can prevent the business from operating at all mean that everyone in the organisation will be impacted.
One high-profile example in Australia is the case of Crown Resorts. Crown had been approved for a transformative project that would revitalise Sydney’s Darling Harbour and make the company the centre of a globally competitive entertainment hub. It was expected to bring tourists in, and while it was a gambling business, the additional infrastructure (including theatres and restaurants) would have shaped the area into something for everyone.
However, poor governance practices contributed to some catastrophic accusations of breaches of gambling regulations and links to organised crime. Once the news broke, Crown faced multiple inquiries, significant fines, and the eventual loss of its licence to operate in Sydney. This scandal had a catastrophic impact on Crown’s financial performance and caused long-term damage to its brand and reputation.
Smaller businesses don’t have the potential scope of a Crown, but the financial and legal risks from poor governance can be just as devastating. The financial impact of fines and litigation can drain valuable resources and distract management from any growth plans that may have been in place.
A long-term consequence of poor corporate governance is that it can very quickly tarnish a company’s image and then it can take the company a long time to recover. Essentially customers, stakeholders and employees are all very slow.
Reputational damage isn’t just localised, either. Reputation tends to be a global asset to an enterprise, and damage done in one area due to poor governance does affect how local consumers and stakeholders view the business. We see this frequently with the pressure placed on organisations that source resources or labour from the global south by communities in their home nations, and it applies equally to the behaviour of a subsidiary of a global enterprise in Australia.
Statistics show that more than half of organisations underestimate the impact of reputational damage to a business. In the context of corporate governance, this impact tends to be a very real blind spot. In reality, any difficulties in retaining talent, and challenges in establishing partnerships, are going to directly and significantly impact business performance.
Advisory practices can play a vital role in helping businesses improve their governance structures and ensure that the business doesn’t materially suffer from poor governance. From assisting with board composition to ensuring regulatory compliance and fostering a culture of transparency, external advisers provide critical expertise that can enhance governance practices.
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