For investors looking to make their money work for them, stocks do not operate in a vacuum.
Beyond the company financials and price history, there is a silent mover of prices that traders are undervaluing — corporate governance. The idea that how a company is directed, controlled, structured, and held accountable affects how the stock will perform in the market in the long term, how it will fare in financial crises, or how it will react to stock-specific news.
Board structure and strategic oversight
What is corporate governance, simplified? At its most basic level, corporate governance is the system by which a company is directed and controlled. Corporate governance structures set guidelines involving a company’s board of directors, its officers, its shareholders, and its auditors. Overall, solid governance practices tend to lead to more prudent, proactive decision-making by corporate leadership, as well as a reduced susceptibility to risks. Essentially, a well-governed company is one that is better equipped to anticipate and tackle issues before they become too problematic. On the investor side, companies that boast the benefits of excellent corporate governance tend to produce more consistent returns and are less prone to “blowups”.
Transparency, disclosure, and market confidence
What is corporate governance, simplified? At its most basic level, corporate governance is the system by which a company is directed and controlled. Corporate governance structures set guidelines involving a company’s board of directors, its officers, its shareholders, and its auditors. Overall, solid governance practices tend to lead to more prudent, proactive decision-making by corporate leadership, as well as a reduced susceptibility to risks. Essentially, a well-governed company is one that is better equipped to anticipate and tackle issues before they become too problematic. On the investor side, companies that boast the benefits of excellent corporate governance tend to produce more consistent returns and are less prone to “blowups”.
Executive incentives and long-term value creation
Another essential element is transparency. Investor trust tends to be higher for companies that commit to clear, prompt, and accurate disclosure of performance and risks. Predictability is rewarded while uncertainty is penalized, with more confidence typically encouraging higher valuations and lower funding costs. Therefore, “bad news” about lower-than-expected results is often less damaging to a company’s reputation and prospects than controversial ESG disclosures or accounting improprieties revealing previously unreported risks. Active investors who allocate capital to company stocks across sectors, acquired directly or through multi-sector products on a site such as https://www.equiti.com/uae-en/products/, will naturally incorporate estimates for governance scores within valuation models, to check if the reported results are likely to continue in the future.
READ MORE: Here’s why the Arizona economy is poised to accelerate
LOCAL NEWS: Want more stories like this? Get our free newsletter here
Governance across asset classes
Executive pay also matters. If the incentives of company bosses are in tune with the long-run interests of shareholders and are not driven by wild swings in equity prices, businesses are more likely to invest in innovation, productivity, and risk management. If not, they may find that the safest way to pump up profits is with sharp accounting practices, drowning the company in debt, or taking on risky activities, such as expansion in overvalued markets. It should come as no surprise that such Treasury-beating deficiencies in corporate governance persist even during the current stock market boom.
Governance as a core input for active investors
Governance factors are becoming more relevant for more than just those who are investing in stocks or other equities. Many equity investors look at governance factors across asset classes, even going as far as to consider indices or, say, mining stocks or related derivatives that can be traded through a commodities trading platform at https://www.equiti.com/uae-en/products/commodities/. Businesses involved in mining or operating in global supply chains are being held to account more and more over how well they’re looking after the planet (as well as the social and governance component too), and in instances where an entity isn’t being a good steward over all these factors, it can have a very material impact on the share price performance.
In sum, corporate governance is what the market uses to look at financial performance. A poorly run company that has high earnings will trade at a discount. A well-run company that has lower earnings will trade at a premium. For those who wish to invest in the world’s markets, and in a multiple asset world, https://www.equiti.com/uae-en/, for instance, investors can educate themselves regarding the importance of governance is a preferable strategy to either ignoring the concepts altogether or focusing exclusively on technical and fundamental analysis.
