Companies with quality corporate governance systems can be better positioned to drive higher returns for investors.
Alternatively, poor corporate governance systems can negatively affect a company’s valuation.
Companies with poor corporate governance expose investors to the following risks:
- Accounting Risk: a company with poor corporate governance may be more likely to issue misleading or inaccurate financial statements.
- Asset Risk: without strong corporate governance, a company’s management may be more inclined to misuse assets.
- Liability Risk: a company with poor corporate governance may enable managers to assume too much financial leverage and put equity value at risk.
- Strategic Risk: without proper corporate governance, management may engage in business transactions which are not in the long term interests of equity valuation.