LOS H requires us to:
identify potential risks of poor corporate governance and stakeholder management, and identify benefits from effective corporate governance and stakeholder management
1.1. Risk of Poor Governance & Stakeholders Management
A system of poor governance and stakeholder’s management may result in:
a. Week Control System. The week control system results from poor audit procedures and insufficient scrutiny by the board. It may result in one stakeholder group benefitting at the expense of the other group.
b. Ineffective Decision Making. The ineffective decision making may be a result of:
i. unavailability of management information to the board of directors, and
ii. remuneration policies encouraging self-interest instead of the stakeholder’s interests.
c. Legal, Regulatory and Reputational Risks. These risks may be attracted due to violations of applicable law resulting in lawsuits by the shareholders, employees, and creditors.
d. Default and Bankruptcy Risk.
1.2. Benefits of Effective Governance and Stakeholder’s Management
Following are the major benefits:
a. Operational Efficiency. This can be achieved through clear delegation of responsibilities and reporting lines across the company; and proper monitoring and control of decisions and activities.
b. Improved Control. The control can be improved through the identification and management of risks at an early stage.
c. Better Operating and Financial Performance. This also reduces the cost associated with the week control system.
d. Lower Default risk and Cost of Debt. This helps protect the creditor’s rights, resulting in lower risk. Also, governance systems relevant criteria amongst the credit rating agencies for assigning the ratings.