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Strong governance will unlock financial performance

Simon Lowe Simon Lowe

For many the U.K. Corporate Governance Code (the Code) remains a compliance issue. They see it as a box ticking exercise to be endured ahead of the annual report; costing time and resource, but delivering little value. It’s a common point of view. It’s also wrong.

Over the past 17 years, we have analysed the governance progress made by FTSE 350 companies, using a structured methodology to assess the governance practices disclosed in their annual reports.

We have consistently found that the strongest governed companies deliver double the shareholder value over a 10-year period than that of the weakest governed companies.

In short if your organisation is still approaching governance as purely a compliance exercise it could be costing you a lot more than you think.

Changing perceptions

Whilst it’s true companies have been taking the Code’s requirements increasingly seriously over the past decade (Code compliance grew from 29% of companies in 2005 to 72% in 2018) too many treat it as guidance foisted on them; a compliance exercise intended to drive best practice.

In reality the opposite is true: the regulator takes best practice examples from successful companies and incorporates them into the Code; it becomes a dynamic instrument, reflecting and distilling best practice and affording everyone else the opportunity to learn from the best.

This is why we believe it is time companies embraced the Code for the tool it is; drawing on the summaries of best practice it contains to bring their own governance in line with the market leaders.

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Business sustainability

But why? It’s a fair question, particularly if your organisation still views strong governance as a ‘nice to have’. The answer is sustainability.

Our research shows that the strongest governed companies create and retain value more effectively than the weakest. This value is visible across the range of metrics, from cashflow to returns, profitability to share price. Most importantly this value is sustainable; these results hold across a 10-year period.

That’s sustainable value creation and retention through consistent investment in governance best practice.

Time for change

No one is claiming strong governance alone guarantees strong performance. It is not the sole arbiter of success. However our findings do clearly link strong governance practices to the likelihood of better returns, improved performance and better operational and financial returns; it is the key to long-term, sustainable value creation.

This is something successful businesses have long understood, a fact our research now conclusively proves and a truth that is both at the heart and reflected throughout the Code. It’s time to stop ticking boxes.

Get smart about governance, the Code and how both can help you create value.