Insights • Investor Relations
Importance of corporate governance among small caps
11 August 2022
Corporate governance is a system that helps companies move toward their business goals, while preventing unwanted conflicts, through a set of policies and processes. Strong corporate governance is not only recognized by investors, employees, customers, and other stakeholders but also has a positive correlation with the valuation multiple commanded by a company.
Despite its importance, lack of corporate governance is one of the biggest challenges faced by small-cap companies. These companies usually trail their larger peers when it comes to corporate governance as big companies usually have an abundance of resources to support evolved governance structures and related reporting. The lack of high-quality corporate governance in small caps also stems from management’s intense focus on achieving growth and profitability targets, which can make governance a lower priority.
Poor corporate governance means small-cap companies may not be able to attract the kind of investors they want and deserve.
Initiating a culture of corporate governance can be done by taking the three following steps:
- Make your corporate disclosures transparent and comparable: Transparency is one of the key tenets of corporate governance as it helps investors ascertain if all of a company’s actions can be verified at any given time or not. Therefore, one must ensure timely and accurate disclosures on all material issues, including the company’s financial health, growth outlook, ownership, and ESG practices to the investment community. This will help increase investors’ trust and boost the company’s reputation among sell-side analysts. In addition to transparency, it is also important that corporate disclosures are delivered in a format that is in line with industry standards and comparable with peers as well as industry benchmarks.
- Have the right board structure and composition: A truly diverse board isn’t limited to having one or two women on the board, but rather one where diversity of thought, experience, and background are also welcome.
- Ensure accountability and conduct periodic performance reviews: Accountability is another key pillar of good corporate governance as investors feel more confident when they have a clear understanding of who will be accountable if something goes wrong in one of the company’s processes or who will be responsible for the company’s accomplishments (which in turn increases investors’ desire to allocate more capital to the company). To ensure accountability, it is necessary to publicly disclose the responsibilities of board members and how the board will deal with any violations.
For investors, corporate governance is on par with financial performance when evaluating a company’s investment potential. As a result, they are likely to invest more in companies that have high levels of disclosure and transparency.
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