Why corporate governance matters

Sound corporate governance practices have become critical to worldwide efforts to stabilize and strengthen global capital markets and protect investors. They help companies to improve their performance and attract investment. Corporate governance enables corporations to realise their corporate objectives, protect shareholder rights, meet legal requirements and to demonstrate to a wider public how they are conducting their business.

Definition
Corporate governance is the relationship between corporate managers, directors and the providers of equity, people and institutions who save and invest their capital to earn a return.
It ensures that the board of directors is accountable for the pursuit of corporate objectives and that the corporation itself conforms to the law and regulations.

Premium for good governance
Research shows that investors from all over the world indicate that they will pay large premiums for companies with effective corporate governance. One such study conducted by The McKinsey Quarterly found that institutional investors in emerging market companies would be willing to pay as much as 30 percent more for shares in companies with good governance. Furthermore, it showed that companies with better corporate governance had higher price-to-book ratios, demonstrating that investors do indeed reward good governance.

Lower Borrowing Cost
The importance of corporate governance has been recognized by the financial sector - most recently, corporate governance practices are also being looked at by rating agencies, and they have an impact on the cost of capital.