Corporate Governance is a state of mind

Despite the many developments on the subject and codes of governance written in many parts of the world, many corporates even today resort to merely formalizing corporate governance practices without the right state of mind in implementing the principles of governance in its true spirit. If businesses truly believe in the benefits of good governance, then why should the requirements be made mandatory for them to follow? If the market incentives are attractive then corporates would voluntarily implement good governance principles, to run their businesses.

Therefore, cost of capital can have a transforming impact on corporate governance. The influence of foreign institutional investors would improve governance practices, voluntarily. These funds impose higher standards of accountability, transparency, independence and other policies. The larger the businesses become they need larger volumes of capital and the capital markets that provide such capital should appropriately recognize the well governed corporates and incentivize them attractively.

Such behaviour will drive corporates towards higher levels of governance standards and influence management to use this as a means to lower its cost of capital.

Until such time, where good governance becomes the state of mind…..
Some people regard private enterprise as a predatory tiger to be shot. Others look on it as a cow they can milk. Not enough people see it as a healthy horse, pulling a sturdy wagon.”— Winston Churchill

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About surenraj

“Views expressed are my own”
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3 Responses to Corporate Governance is a state of mind

  1. Richard Ebell says:

    The argument is that cost of capital is lower if there is good governance; so firms are motivated in that direction and there is no need for mandatory governance codes. I am sure Suren intended this as “utopian”.

    In reality lowered cost of capital may *not *motivate good behaviour. Or *influence *and *size *can make for a low enough cost of capital, making good governance superfluous. (The August 2nd edition of *The Economist, *referring to an Indian conglomerate, says that “*…India’s most enthusiastic investor is a how-not-to guide to good governance*”.) There must be parallels to this in Colombo!

    ​Good governance cannot exist without a genuine, deep-rooted *commitment *to it by the people who matter. Without this, codes have little use, but with this commitment they are helpful in giving structure to intent and keeping people reminded about what good governance is.​

    Richard Ebell

  2. Nuwan says:

    Today corporate gov aim just for compliance more for Annual report awards…..

  3. surenraj says:

    I do agree with both comments. Two additional points given by Richard, I.e, genuine, deep rooted commitment and intention for good governance would help in making this a state of mind. However, the market also should help in incentivizing or do the opposite and punish bad governance. This is similar to the discussion on Sustainability being a moral case or a business case?

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