Strong Corporate Governance Improves A Company’s Bottom Line

"If you were to ask a person on the street, “What’s the meaning of cor­porate governance?” the chances are they wouldn’t be able to provide a definition."
23 Mar 2019 18:58
Strong Corporate Governance Improves A Company’s Bottom Line

If you were to ask a person on the street, “What’s the meaning of cor­porate governance?” the chances are they wouldn’t be able to provide a definition.

At its heart, corporate governance is defined as the structure and processes by which companies are directed and controlled.

Globally—from the developed to the developing world—there’s no short­age of examples where companies and their boards have been cited for fail­ing to act in the best interests of their shareholders and customers.

The global financial crisis, which af­fected both developed and developing countries, has been cited as a systemic failure of corporate governance.

Corporate governance definition matters.

So the definition of corporate govern­ance matters. Good corporate govern­ance can help a company attract invest­ment and improve its bottom line.

Just consider the case of the larg­est microfinance institution in Timor Leste, Kaebauk Investimentu No Fi­nansas, SA (KIF), originally known as Tuba Rai Metin (TRM).

Almost six years ago, the corporate governance team within the Interna­tional Finance Corporation (IFC) be­gan working with KIF to evaluate its corporate governance framework to identify critical weaknesses and an ap­proach for adopting better governance practices.

IFC, the largest global development in­stitution focused on the private sector in emerging markets, is a sister organi­sation of the World Bank.Work started at the top—with the company’s board.

KIF’s board members were experi­enced in local business.

But in line with best practices, we advised the board to diversify its expe­rience of its members to strengthen oversight.

The goal was to bring in one or two independent directors, preferably with specific industry experience.

The role of the board’s chairman was formalised.

A succession plan was put in place for board members, along with an induc­tion training programme.

The role of corporate secretary was created for the first time. Audit and risk-management committees with roles and responsibilities codified in separate by-laws were set up to help manage risks.

A human resources committee was set up to help provide greater focus on attracting, developing, and retaining employees.

As KIF diversified its ownership and brought on strategic shareholders, its adoption of better corporate govern­ance practices created a more attrac­tive, investor-friendly corporate envi­ronment.

It was a move that paid off for the com­pany.

IFC’s followed up its work to strength­en KIF’s corporate governance frame­work by taking an equity position in the company.

That provided confidence for another equity investor—(Base of the Pyramid Asia (BOPA), — to come in.

Investor confidence was also evident in KIF’s ability to gain access to US$19 million (FJ$40m) in financing, as well as over US$4m (FJ$8m) in lines of credit.

KIF’s profitability has also grown steadily, climbing to more than US$1m (FJ$2m) in 2107, up 46 per cent on the previous year.

In addition, the company now has in place active measures to identify and handle any potential risks.

KIF’s effort

Most significantly, KIF’s effort to boost its corporate governance led to a much stronger reputation in the market, which in turn enabled KIF to obtain capital at lower cost.

After IFC’s equity investment, the company secured loans for which the interest rate dropped from eight to six percent.

Across the Pacific, businesses have much to gain by following KIF’s exam­ple—and governments and policymak­ers are showing growing interest in strengthening corporate governance.

In November 2017, IFC, with sup­port from the Australian government, launched the Pacific Corporate Gov­ernance Institute (PCGI) in Fiji.

The institute, endorsed by the Re­serve Bank of Fiji, aims to help boost the performance of Pacific companies, state-owned enterprises and banks by highlighting the value of good corpo­rate standards.

On April 4, the inaugural 2019 PCGI Annual Pacific Governance Summit will be held in Fiji.

It will bring together local and region­al businesses, governments, academ­ics, and civil society representatives to share knowledge and increase aware­ness of good corporate governance practices.

Two corporate governance trainings will occur the same week—a corporate governance action-planning session for companies and a two -day training for audit committees.

The evidence is now clear: Companies that improve their corporate govern­ance practices enjoy significantly high­er returns on equity, lower credit risks, and increased development impact.

Strong governance can boost the confidence of potential investors and business partners, improving access to capital. It’s now time for all business to act. A good start would be the first inau­gural PCGI Summit in Fiji.


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