Lesson 7 of 7 · All lessons in this module
- Principal-agent relationships and agency costsVideo lesson
- Managers versus shareholders: five ways interests diverge
- Controlling versus minority shareholders, and shareholders versus creditors
- Reporting, shareholder meetings, activism and takeovers
- Creditor protections and board committees
- Employees, customers, suppliers and governments
- Risks of weak governance and benefits of strong governance
Lesson 7 of 7 · 14 min
Risks of weak governance and benefits of strong governance
Weak governance exposes a company to operational, legal, regulatory, reputational and financial damage, while strong governance improves operations and lowers the cost of debt and equity by making investors trust what they see.
In short
- Operational: weak controls let one group gain at others' expense (up to fraud); strong controls, an independent audit committee and clear authority mitigate risk and improve efficiency.
- Good governance mitigates risks such as fraud, or catches them early; it does not eliminate them.
- Legal, regulatory and reputational: compliance failures bring investigations, lawsuits and lasting reputational costs; a good reputation helps attract talent, capital, customers and better supplier terms.
- Financial: weak creditor protection raises default risk and the cost of debt; better governance raises the chance of rating upgrades and lowers the cost of debt and equity.
- Studies link experienced audit committees to better crisis performance, and board diversity and independence to valuation.
- Analysts should examine ownership and voting, board skills, pay alignment, major investors, shareholder rights versus peers, and long-term risk management.
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