Curmi & Partners

Deriving Value from Good Corporate Governance

By Beppe Jaccarini

In today's business landscape, good corporate governance has emerged as a crucial factor for long-term success and sustainability. By implementing robust governance practices, companies can enhance their operational efficiency, attract investors, and mitigate risks. The stringent governance requirements imposed on companies when listing on the Malta Stock Exchange (MSE) should be embraced as a catalyst for further development, rather than perceived as a burden or distraction from business activities that translate into cash immediately.

Building investor confidence: A company's commitment to good corporate governance signals its dedication to transparency, integrity, and responsible business practices. This, in turn, instils confidence in investors, attracting capital and supporting stock prices. For instance, in 2018, Facebook faced a major scandal involving the misuse of user data which severely damaged the company's reputation and led to a significant decline in its stock price. However, by addressing governance shortcomings, implementing stricter data protection measures, and enhancing board oversight, Facebook was able to regain investor trust and rebuild its share price.

Mitigating risks: Effective corporate governance frameworks enable companies to identify and mitigate risks, safeguarding their financial performance and shareholder value. The Volkswagen emissions scandal in 2015 serves as a stark example of governance negligence leading to severe consequences. Owing to negligent governance practices and a lack of oversight mechanisms, emission tests were manipulated, resulting in substantial fines, litigation, and a significant drop in its stock price.

Enhancing operational efficiency: Sound corporate governance practices streamline operations, enhance decision-making processes, and promote efficiency. Companies with effective governance frameworks experience improved operational performance, leading to increased profitability and higher shareholder returns. The success of Apple Inc. can be attributed, in part, to its strong governance practices, which have facilitated innovation, strategic decision-making, and sustained growth in share prices.

Attracting long-term investors: Companies with strong corporate governance structures tend to attract long-term investors who value stability, ethical behaviour, and sustainable growth. Warren Buffett's Berkshire Hathaway is renowned for its adherence to good governance principles, which has contributed to its success. Investors are confident in Buffett's commitment to shareholder interests, ethical conduct, and long-term value creation, resulting in a consistently high share price and investor loyalty.

Locally, there is a growing awareness among regulators and market participants about the significant benefits of robust corporate governance practices. While the progress may be gradual, there is an encouraging shift towards recognizing and investing in this essential aspect of the business. Furthermore, when a company pursues listing on the MSE, it must adhere to the regulator’s provisions outlined in Chapter 5 of the Capital Markets Rules (CMRs). This chapter primarily addresses the continuous obligations that listed companies assume upon their listing. Besides promoting accountability and ethical practices, these obligations require companies to operate with transparency, providing regular and timely information to enable investors to evaluate the investment’s attractiveness. Key aspects include:

  1. Board Structure and Composition: Companies must establish a board with a balanced mix of executive and non-executive directors. Independent directors should be appointed to ensure impartial decision-making and robust oversight.
  2. Audit Committee: A dedicated audit committee must be established, comprising independent directors responsible for financial reporting oversight, risk assessment, and internal controls.
  3. Shareholder Rights: Companies must protect the rights of shareholders, ensuring equitable treatment, timely access to information, and opportunities for effective participation and voting.
  4. Financial Reporting: Accurate and transparent financial reporting is essential. Companies must adhere to accounting standards, regularly publish financial statements, and provide timely updates to shareholders and the MSE in the form of company announcements.
  5. Risk Management: Robust risk management frameworks should be implemented to identify, assess, and manage risks effectively.

In conclusion, the adoption of robust corporate governance measures presents a valuable opportunity for companies to cultivate a culture of transparency and accountability. By embracing the continuous obligations set out in the CMRs and endeavouring to adopt the Code of Good Corporate Governance, listed companies not only fulfil regulatory requirements but also inspire investor confidence and establish themselves as trustworthy entities. This commitment to ethical practices lays the foundation for sustainable growth and long-term success, allowing companies to build a positive reputation and create enduring value for stakeholders, especially, but not exclusively, shareholders.

The information presented in this commentary is solely provided for informational purposes and is not to be interpreted as investment advice, or to be used or considered as an offer or a solicitation to sell/buy or subscribe for any financial instruments, nor to constitute any advice or recommendation with respect to such financial instruments. Curmi & Partners Ltd. is a member of the Malta Stock Exchange and is licensed by the MFSA to conduct investment services business.