Good corporate governance makes sound commercial sense (Part 1)
‘Good corporate governance helps companies operate more efficiently, improve access to capital, mitigate risk, and safeguard against mismanagement.’ (International Finance Corporation). (1)
Q1 2025 - (released May 2025)
SA's quarterly Private Equity & Venture Capital magazine
Musings of a reconditioned private equity partner
by Peter Mason
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Good corporate governance makes sound commercial sense (Part 1)
‘Good corporate governance helps companies operate more efficiently, improve access to capital, mitigate risk, and safeguard against mismanagement.’ (International Finance Corporation). (1)
Much literature suggests that there is a clear correlation between equity value, the ability to raise debt – as well as the price at which debt is provided – and good corporate governance. Many private companies, though intuitively recognising this as common sense, often fail (at their cost) to address it properly.
I recently returned to legal practice after a decade working as a partner of a private equity fund manager. I reflected that there are some lessons that I learned at the coal face about investing in businesses and managing debt which could bear repeating. A previous partner of mine frequently observed that “common sense isn’t very common”. I hope, if this all appears to be blindingly obvious, that you will forgive this common sense approach. My intention in this case is merely to remind you of something you probably already know – ensuring the implementation of good corporate governance is commercially sensible. During my business career, I haven’t encountered anyone who didn’t agree, at least in principle, with this proposition.
When evaluating a prospective investment, a serious private equity investor will, always conduct a comprehensive review of its corporate governance. This enquiry is not restricted to financial investors, however, and the same considerations would apply in relation to raising debt and, for that matter, to any corporate action involving an acquisition, merger, subscription, or any other similar process.
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Most executives I have met, and most boards I have either sat on or worked with, invariably believed that even if a bit of improvement may be necessary every now and then, the principles of good corporate governance are generally applied by them or, at the very least, the governance measures at their company are sufficient for its specific requirements. I am unconvinced.
I have looked at many privately owned businesses, and it is unusual to encounter one that has, neatly filed away, a complete set of resolutions or full set of minutes – at both board and shareholder level. This is understandable, as establishing and maintaining these records is an inconvenience which requires attention and is often a detailed and boring process. What executive teams often fail to appreciate is the cost of this failure.
An email exchange between management and the board is seldom formally documented. Likewise, if the executive team are also board members, formal board meetings are seldom held. Most executive teams regard themselves as serious, professional people who communicate decisions, and whose behaviours are both considered and deliberate. More often than is comfortable, however, the formal record of a company’s decisions and actions is found in emails, electronic messages, and the recollections of various individuals. The absence of a formal record makes the entire decision-making process opaque.
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In more highly regulated environments, governance implementation is less of an issue, though recent press coverage of some failures may make a lie of that statement. In the private company space, however, where resources are scarcer and time is limited, it is frequently easy to let things slide.
The King IV Report on Corporate Governance for South Africa 2016, which will shortly be supplemented by King V, is the authority on the subject in this country, but a quick internet search will reveal a plethora of both South African and international resources and papers on every aspect of the subject of corporate governance. Don’t let this fool you, however; the availability of resources merely means that they exist, but not necessarily that they have been considered.
There is much literature about the link between successful businesses and good corporate governance. While this link may seem self-evident, in my experience from private equity, it does not always seem to be appreciated.
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The simplest reason for getting governance right is to allow some light to be shone into the world of corporate decision-making, so that decisions taken may be seen to be both rational and lawful. If the information available is transparent, comprehensive and complete, then anyone who views it is equipped to make the best possible decisions for the company in the shortest possible time.
At the acquisition stage, if the information provided to a prospective investor is clear and easily available, they can quickly evaluate the risk environment within which the business operates and make sensible and informed decisions. The investor can develop a clear and detailed view of the company’s history, the challenges it has faced and how it overcame them, and the threats and opportunities in the environment in which it presently operates.
Banks and other third-party credit providers also really like to see that this information is available. Again, for all the same reasons, information that is clear and available enables them to make credit and related risk decisions much more effectively.
Private companies looking for investors or finance would be well advised to ensure that their governance practices are set up to facilitate these kinds of reviews. A business which has effective governance structures and processes in place looks like it is being well run.
Mason* is a Senior Consultant | Bowmans
*Peter is an ex corporate finance and banking lawyer. After leaving banking, and a brief sojourn at a large SA law firm, he spent 10 years as a partner of a private equity fund manager based in Johannesburg.
