Good corporate governance and transparency is a win-win for investors and companies

IN THE world of investing, a company’s corporate governance and transparency play a pivotal role in helping investors make informed decisions. A well-governed company that values transparency is often a safer bet for the man-in-the-street investor.

Corporate governance is the system of rules, practices and processes by which a company is directed and controlled.

Transparency is about how openly a company shares operational and financial information.

Both of these affect a company’s reputation, operational efficiency and long-term sustainability – and can make companies more appealing to everyday investors.

First, such companies tend to be more reliable and trustworthy, which in turn reduces the investor’s risk. A paper published by Harvard Business School and the Wharton School, Corporate Governance and Equity Prices, observed that firms with stronger shareholder rights had higher firm value, better profitability and higher dividend payout ratios.

Good corporate governance practices can protect investors’ rights better. Companies with robust governance structures have mechanisms to prevent fraud, mismanagement and conflicts of interest. A 2017 study by the Asian Development Bank found that investors were willing to pay a premium for companies with strong governance, almost as a form of insurance with regard to the investment.

As for transparency, a corporation that ensures prompt and accurate disclosure of all material information is one that enables investors to make informed decisions.

The American Finance Association’s Journal of Finance noted that at the operational level, transparent firms had lower financing costs, which could potentially lead to higher returns. In quantifying this, the Chartered Institute of Management Accountants observed that companies with transparency in financial reporting had a 9.4 per cent increase in return on assets.

Interestingly, companies that prioritise corporate governance and transparency usually have a strong focus on long-term sustainability rather than short-term gains.

Research by Harvard Business School and the London Business School showed that firms that voluntarily adopt sustainability policies, integrating both social and environmental issues, significantly outperform their counterparts in the long term – which of course benefits investors.

Form and framework

So how can the everyday investor identify companies with good corporate governance and transparency?

Steps include looking for companies with independent and diverse boards, checking if the company regularly publishes comprehensive and easy-to-understand financial reports, and researching the company’s history to see if it has been involved in governance-related scandals. Often, well-governed companies will have clear (and published) policies on ethics, conflicts of interest and whistle-blowing.

Those that take sustainability seriously will report on environmental, social and governance factors, paying attention to the impact of their businesses.

For example, transparent companies transitioning from carbon-intensive businesses to lower-carbon ones will articulate their efforts, laying out the steps and trade-offs.

Companies that set the right tone from the top on governance and transparency, through their boards and leadership teams, will create rigorous processes, controls and – critically – a culture to manage risks, thus preventing financial losses and reputational damage.

Not surprisingly, companies recognised for corporate governance and transparency are more likely to attract and retain top talent. Individuals prefer to work for companies that are well-governed, transparent and ethical. In a LinkedIn survey, 69 per cent of professionals said they would not take a job with a company that had a bad reputation, even if they were unemployed.

Advocacy and measurement

The familiar phrase “what gets measured gets managed” – widely attributed to management expert Peter Drucker – expresses the idea that if one measures something, one is more likely to act on this information. This applies to corporations in the areas of governance and transparency, too.

There is growing interest in measuring and benchmarking where companies stand on governance and transparency, relative to their peers. In Singapore, there are annual assessments such as the Singapore Governance and Transparency Index, which assesses corporate governance practices of Singapore-listed companies.

Such indices serve as a proxy for the integrity of companies, and help to satisfy stakeholders – retail and institutional – who demand greater transparency and accountability.

Investors also want their voice to be heard by companies and regulators. Here, retail investors are disadvantaged vis-a-vis institutional investors. Unlike corporate investors with larger teams of experts and, consequently, a larger voice, the voices of retail investors are often less aggregated or pronounced.

In the Singapore context, non-profit organisations such as the Securities Investors Association (Singapore) seek to be the voice for retail investors: raising investors’ concerns to regulatory bodies such as the Monetary Authority of Singapore and the Singapore Exchange, as well as pushing for policies that protect and benefit retail investors.

Shareholder activism

A related but seldom-discussed topic is whether being proactive on governance and transparency can ward off shareholder activism.

Without sounding simplistic, transparency – in operations, financials and governance – builds trust among shareholders. When investors trust the management, they are less likely to engage in activism.

Being transparent also reduces information asymmetry, giving all shareholders access to the same information. This can prevent misunderstandings or misconceptions that might otherwise encourage activism.

Being proactive about good governance also demonstrates that the company holds itself accountable for its actions. This can reassure shareholders that their interests are being considered and protected, reducing the need for activism.

Another benefit of transparency is preventing unpleasant surprises. By regularly disclosing information about the company’s performance and prospects, management can prevent surprises that trigger shareholder activism.

Some companies have gone further, creating communities with shareholders to maintain a greater level of communication and connectivity.

The Straits Trading Shareholders’ Club, for instance, serves to better connect the company with its shareholders and strengthen ties with them in a constructive manner. Registrants have priority to talks, networking sessions, webinars and investment product launches.

However, it’s important to note that while proactive governance and transparency can reduce the likelihood of shareholder activism, they can’t eliminate it entirely.

Some shareholders may hold different views on the company’s strategy or performance, and may still choose to express these through activism.

In such cases, the company’s proactive approach to governance and transparency can, hopefully, help it respond effectively to the activism, by providing a channel for dialogue and resolution.

The importance of trust

Corporate governance and transparency have become key pillars of investment decisions. They not only shape a company’s reputation, but also affect its performance, risk profile and, more importantly, investor trust.

The Edelman Trust Barometer highlights transparency as a key determinant of trust in businesses. For investors, trust in a company influences their investment decisions and perception of risk.

Consider two examples of companies whose good corporate governance and transparency have contributed to their stock-market valuations and overall success.

One is Johnson & Johnson. Despite facing challenges, it has been able to maintain its reputation through a commitment to transparency and good corporate governance. The company’s focus on sustainability and ethical practices has contributed to its stock-market resilience.

Another is Microsoft, which has consistently been recognised for high standards of corporate governance and transparency. It has a diverse board, clear ethics policies and strong shareholder rights. Microsoft’s governance practices have contributed to its strong reputation, which has helped drive up its stock price.

While there is no certainty in business, one thing is clear: Companies that show good corporate governance and transparency not only build trust with stakeholders, but also contribute to sustainable growth and increased stock-market value. And that is a good thing – for investors and companies alike.

The writer is group general counsel and chief sustainability officer of Jardine Cycle & Carriage, a member of the Jardine Matheson Group. Jardine Cycle & Carriage was honoured as a joint winner at the Sias Investors’ Choice Awards 2024, with the Singapore Corporate Governance Award (Big Cap Category) and Most Transparent Company Award (Industrials Category).