Good Governance Crucial for Profitability

Two studies conducted by Russel Reynolds Associates present valuable insights on the topic: one sought to elaborate on the nature of the correlation between good governance and profitability in family owned businesses while the other analysed global and regional trends in corporate governance practices as well as what companies around the globe could expect the environment to look like in 2017.

Large institutional investors have increasingly showcased pressure on companies in implementing practices in line with good Corporate Governance. In fact, management boards are encouraged to adopt a long-term outlook when assessing value creation, particularly in family owned firms.

The former, entitled ‘The Profitability of Corporate Governance in Family owned companies’, first makes mention that in emerging markets, a 60% proportion of companies with a turnover of US$ 1Bn and over are family owned. With high responsibility in the economic development of their regions, family businesses must face obstacles that range from project financing to access to R&D. The implementation of good corporate governance seems to be an important criterion in tackling these issues. Indeed, companies which followed the recommendations to implement a good corporate governance have already been found to be more profitable.

The study defines good corporate governance as the principles and regulations governing a business operation covering activities ranging from the protection of the interests of all shareholders to the definition of management compensation policy. The creation of an effective board is intuitively of sound importance to achieve these good practices. Board assessment, recruiting independent directors or advisors and CEO succession planning are three stages towards corporate Governance identified by Russel Reynolds Associates. Finally, family businesses need also to attract and retain qualified non-executive and top executive directors. “Emotional profitability”, a key attribute of family businesses, is to inspire potential directors to thrive in an environment that promotes shared values, sustainable profitability and common interests rather than centering on short-term profitability.

The second article, ‘Global and regional Trends in Corporate Governance for 2017’, illustrates, as its name suggests, the corporate governance landscape in 2017. A global push for more uniform standards of corporate governance will continue to be exercised by institutional investors. In addition, institutional investors will directly engage with companies to advocate governance reforms in environments where legislation might have not yet taken place. Also, a long-term approach to value-creation has gained more momentum.

Based on global experience and research, Russel Reynolds Associates believe that public companies will likely face the following trends in 2017: Increasing expectations around the oversight role of the board, optimization on board refreshment and composition, greater surveying of plans promoting sustained value creation and a greater focus on Environmental, Social and Governance (ESG) issues. Greater insights into trends and implications for five key regions and markets is presented: the US, the EU, India, Japan and Brazil.

For the complete studies:
‘The Profitability of Corporate Governance in Family owned companies’
‘Global and regional Trends in Corporate Governance for 2017’