Is corporate governance critical to business growth or a red-tape exercise that ultimately adds little value?
Depending on where you sit on the debate about governance and the decision-making frameworks it under-pins, one of the above statements will ring true. You’ll know it. Intuitively. But in such volatile times, is relying on your intuition enough?
Our new research paper combines the findings of academic studies from around the world with original analysis of our own data to take the uncertainty out of the argument and replace intuition with something equally valuable in business decision-making – proof.
Since 1992, the UK Corporate Governance Code (the Code) has aimed to establish guiding principles for listed companies on a comply or explain basis. Supporters believe that by promoting strong governance the Code establishes corporate structures that align decision making, improve leadership, accountability and effectiveness, and ultimately drive better corporate performance.
Others disagree. For them the Code is a compliance exercise to be tolerated rather than embraced; something that actually detracts from decision-making whilst, most damningly, adding little value.
What’s been lacking since the Code’s inception is rigorously researched evidence that either cements the link between strong governance and creating and sustaining value or exposes the Code as the box-ticking exercise its critics claim. Our paper aims to change that.
Compiled in two parts, the paper combines a review of selected international academic studies from 1996 to 2012, as well as the prevailing consensus with analysis of data gathered for the Grant Thornton UK Corporate Governance Index (CG Index) over a 10-year period.
What’s important here is that the CG Index captures how FTSE 350 companies apply the Code, providing a unique insight into whether that, in turn, leads to building and sustaining value.
The paper proves that companies with strong governance operationally outperform those with weak decision-making frameworks and generate more value for the company, shareholders and lenders.
Not only that, but by drawing on its original research, the paper goes further, demonstrating that:
those with strong governance also retain more value than those that don’t
the Code is a valuable blueprint from which to develop a decision-making infrastructure
perhaps most importantly those using the Code to improve their approach to governance will generate higher returns, both operational and financial, in line with any sustained investment they make.
In light of this, corporate governance should not be treated as a box ticking exercise, but as an intentional framework within the business.
Of course, strong governance is only part of any business success story, but it remains one that is often overlooked. With the new Code in effect since the beginning of 2019 it is the perfect time for businesses to review their approach to governance and start work that could transform their ability to create and retain value.
Not based on a hunch, or intuition, but driven by something far more compelling.