In today’s increasingly complex economic environment, corporate governance is critical in ensuring business resilience and long-term success. Companies are facing heightened uncertainty and rapid changes, from shifting market dynamics to evolving regulatory requirements.
These challenges underscore why corporate governance is no longer a choice but a necessity. An MSCI analysis delved into the corporate performance of U.S. companies over a nine-year period, from January 2015 to December 2023, and compared companies that are leaders in governance to those that lagged behind in this area.
The report showed that, in developed markets, companies with good corporate governance practices achieve higher profitability, lower volatility and lower earnings variability. They also have the added bonus of demonstrating greater resilience to adverse events or potential crises. An example is what happened in the context of the Covid-19 pandemic, where “well-governed companies bounced back more strongly” and maintained their earnings in the years afterward.
However, this trend tended to be weaker in emerging markets, which I believe stresses the need for minimum corporate governance standards, both in these cases and in developed markets. Doing so would strengthen the competitiveness of local companies and, at the same time, level the global playing field, promoting more equitable and sustainable growth.
In this context, I would like to highlight the G20/OECD Principles of Corporate Governance (download required), which were updated in 2023. These principles have become an international reference to guide those who develop and supervise public policies and regulations at the global and local levels in order to evaluate and improve the legal, regulatory and institutional framework of corporate governance. They are a guide for decision-makers who aim to improve corporate governance practices in alignment with sustainable development goals to create a more responsible, resilient, transparent, trustworthy and honest business environment that boosts investment, innovation, and productivity. These principles also offer a framework for investor protection.
Therefore, I believe it is essential that companies adopt these governance practices, as doing so could not only help protect organizations from risks but also allow them to capitalize on opportunities in today’s challenging global environment. Corporate governance can then be a virtuous cycle that begins by strengthening companies and continues to contribute to the resilience and sustainability of the global economy as a whole.
Here are my seven key points boards and companies can use to strengthen corporate governance based on these principles:
1. Incorporate sustainability into the core strategy.
Integrate sustainability into the essence of the company and its operations. This allows leadership to align business objectives with responsible values and purposes. This means that by prioritizing sustainability, companies can respond to the demands of key stakeholders with greater transparency, ethics and accountability. As an additional benefit, they may be able to improve their reputation in the eyes of their clients, investors and consumers, which can translate into access to new markets and investment opportunities.
2. Promote diversity of perspectives.
Boards should have a diverse composition in terms of gender, nationality, skills and experiences. This enriches board members’ perspectives and can foster more effective decision-making. A variety of points of view also allows boards to better address business challenges and opportunities while promoting a more dynamic organizational culture that positively impacts employee commitment and satisfaction.
3. Ensure transparency and accountability.
Companies must guarantee transparency in the presentation of all relevant information, both financial and non-financial. This can improve the communication and disclosure of key risks, opportunities and sustainability practices, as well as offer a clear view of the company’s economic performance, strategy and long-term challenges. At the same time, promoting transparency and accountability can strengthen stakeholder trust, build strong relationships and promote continuous improvement.
4. Strengthen shareholder rights.
Facilitate active shareholder participation by improving voting mechanisms and communication channels. This helps ensure their voices are heard and their interests are protected and aligned with the company’s long-term objectives. Maintaining open and regular communication regarding the company’s performance and adopting strategies and key decisions can further reinforce their trust and commitment, promote more inclusive governance and may even attract more investors.
5. Promote a culture of ethics and compliance.
Companies must have effective compliance programs, which should not only prevent corruption and unethical practices but also promote a culture of integrity and accountability throughout the entire organizational structure. These programs should also involve every employee, from senior management to operational levels. This can help protect the company from potential corporate crimes and strengthen stakeholder trust.
6. Link the incentive system to compliance programs.
Consider a compensation structure linked to policies and procedures. This can ensure good practices will allow companies to reward the achievement of ethics-based objectives and adequately motivate collective and individual performance, which reduces the risk of falling into unethical conduct. To do so, it is essential to monitor compliance by focusing on achieving goals and verifying how they were achieved.
7. Integrate risk management into the corporate strategy.
Incorporating risk management consists of identifying and assessing how potential risks can affect different stakeholders, business operations and objectives. Then, companies need to create proactive mechanisms to manage and mitigate those risks effectively. This can translate into a greater capacity to adapt and respond to crises, market disruptions and regulatory changes, as well as greater overall organizational resilience. Thus, companies can also improve their ability to innovate, take advantage of opportunities and operate sustainably in uncertain and volatile environments.
I believe companies with solid corporate governance are more dynamic and have greater capacity and tools to adapt to changes. This, in turn, is more likely to improve financial results, increase opportunities and bolster investment. The great challenge is to level the playing field so that all companies, in both developed and emerging markets, have the possibility to grow and operate resiliently in a globalized world.
While solid regulatory frameworks can help achieve this, it’s also essential to promote governance practices that allow all companies to compete on equal terms while taking into consideration the specific characteristics of each local business environment. This will strengthen the virtuous cycle that could not only drive corporate success but also impact economic growth, which benefits society as a whole.
By Susana Sierra
Published un Forbes