Risks and Benefits of Corporate Governance and Stakeholder Management | CFA Level I Corporate Issuers

In this lesson, we’ll explore the risks of poor governance and stakeholder management, as well as the benefits of effective governance and stakeholder management.

Risks of Poor Governance and Stakeholder Management

Some of the risks associated with weak corporate governance include:

• Advantages for certain stakeholders: Weak control functions can allow some stakeholders to benefit at the expense of others, as seen in the Enron scandal.
• Ineffective decision-making: Poor governance can lead to suboptimal risk management and lower returns for shareholders, or inappropriately high-risk projects if the remuneration plan is poorly structured.
• Undetected related-party transactions: Unfair transaction terms can harm the company’s value.
• Compliance and regulatory risks: Weak governance can lead to legal, regulatory, or reputational risks, with potential investigations or lawsuits resulting in significant costs.
• Default and bankruptcy risks: Poor governance can affect a company’s financial position and ability to meet debt obligations, potentially leading to bankruptcy and negative consequences for various stakeholders.

Benefits of Effective Governance and Stakeholder Management

Effective corporate governance and stakeholder management can provide several benefits, such as:

• Improved control and monitoring: Effective governance enhances the company’s audit systems, mitigates regulatory or legal risks, and ensures fairness in relationships.
• Better operational efficiency: Clearer understanding of responsibilities, aligned interests, and strategic focus contribute to improved efficiency.
• Enhanced financial performance: Reduced costs associated with weak control systems and faster response to market factors lead to better financial results.
• Lower risk of default and reduced cost of debt: Improved financial performance and trust-building with creditors can lower a company’s cost of debt and credit rating agencies may view the company more favorably.