17/07/2024·4 mins to read
Inflation Drop: Time to re-examine governance for future growth
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Today’s inflation announcement is welcome news for the New Zealand economy, increasing predictions that the RBNZ may cut interest rates before the end of the year. With the OCR at its highest since 2008, businesses have been struggling, evidenced by the $1.7 billion drop in the corporate tax take compared with the December 2023 forecast.
Corporate Partner and NZ Lawyer M&A Dealmaker of the Year, Anastasiya Gamble, says that while many directors will be closely monitoring company performance, others are eyeing the opportunities that will arise once rates drop. Boards that want to be in good shape to seize those opportunities should take the time to review their governance practices and policies while they wait for lower interest rates.
Good governance increases company value
Good governance practices can enhance a company’s reputation and brand, lower the cost of capital and create opportunities for growth and value creation. According to Anastasiya, the robust risk management strategies inherent in good governance frameworks reduce the risk profile of a company, making it more attractive to lenders and investors.
“Good governance enhances investor trust and credibility, which can reduce the cost of equity as investors are more willing to invest at lower returns due to perceived lower risks. Additionally, stable and strategic long-term planning, a hallmark of effective governance, appeals to long-term institutional investors who prefer predictability and are typically more amenable to lower returns for lower risk, thus further reducing the cost of capital for the company. These factors collectively enhance the company’s ability to attract affordable capital, crucial for sustained growth and operational stability.”
Defining good governance
Over the last 30 years, the role of directors has evolved considerably, and they are now subject to higher expectations and more scrutiny than ever before. Balancing shareholder expectations with the sustainable long-term interests of the company, while also navigating the increasingly complex maze of duties directors face, is even harder in the current economic climate.
It is now accepted that directors must be competent outside their core areas of expertise to be able to perform their role, and shareholders and the courts have become more willing to hold directors to account. The best strategy available to directors to avoid missteps is to ensure their board maintains good governance.
Anastasiya notes that good governance is a concept that is difficult to define but easy to recognise. At its core, it is a combination of arrangements and frameworks to ensure accountability and transparency in decision making and execution, allowing the company to meet its strategic goals. At a minimum, directors should:
- Establish compliance policies for key obligations.
- Invest sufficient time and resources to ensure compliance.
- Undertake regular and comprehensive reviews of the company’s true position against that compliance framework to track progress and keep updated of any new developments.
- Ensure appropriate reporting frameworks are in place to keep directors informed of the company’s position and obligations.
- Actively participate in board meetings.
- Seek and use professional advice when appropriate.
- Ensure there is robust discussion at board meetings before important decisions are made, and make sure meeting minutes reflect it.
Good governance brings other benefits
A solid reputation from strong governance practices also brings other benefits. Sustainability and corporate social responsibility (CSR) have become increasingly important to stakeholders. Companies with strong governance are better positioned to implement sustainable practices and CSR initiatives, benefitting the environment or society while enhancing the company’s image and market position. Engaging in responsible business practices can open new markets and customer segments that prioritise sustainability.
Companies known for their ethical standards and good governance practices are more likely to draw top talent, critical in today’s market. Generation Z has a reputation for preferring to work for organisations aligned with their personal values, and this is a growing trend amongst employees beyond Gen Z. In the current economic climate, companies with strong governance practices are also more likely to appeal as stable, transparent work environments, boosting morale and increasing retention.
Good governance also increases operational efficiency by streamlining decision-making processes, reducing waste and inefficiency. This allows companies to maximise use of resources and ensure decisions are based on accurate and timely information, leading to smoother operations and the ability to respond more quickly to market or regulatory changes.
Room for improvement?
A 2024 PwC Board Effectiveness survey of C-suite executives in the United States found that, while the majority believe their boards comprehend strategy and risk well, only 29% thought their board’s performance was good or excellent.
Anastasiya says that New Zealand has a very high calibre of directors, but the governance environment in which directors operate has become increasingly complex. However, instead of viewing it as a burden, directors should appreciate the benefits effective board environment brings.
“Good governance is not only about minimising risks but also creating opportunities. In today's world, good governance is multifaceted, focusing on transparency, accountability, and strategic alignment with the company's long-term goals. Good governance helps to protect a company’s reputation and brand value and is the best protection directors have against breaching their duties.”
Robust governance practices and policies protect companies and directors against risk and increase opportunities. By integrating good governance procedures into their operational and strategic frameworks, companies can better anticipate and mitigate potential challenges and improve the bottom line. This makes it easier to navigate tough economic conditions and positions the company for growth when conditions improve, which we are hopefully beginning to see in the near future.
Get in touch
Please reach out to Anastasiya or anyone in the corporate team if you would like any guidance for your business.
Contacts
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