Corporate governance is important to a large-cap company because it serves as a framework for the business relationships among a firm's shareholders, management teams, board of directors and all other key stakeholders. An effective corporate governance regime embodies the principles of transparency, integrity and accountability – all aimed to create more strategic value for investors – and the broader community. The importance of corporate governance cannot be overstated.
Given that a large-cap company often operates in more than one industry and internationally, robust corporate governance practices are essential to support the implementation of the company’s numerous strategies and business operations. Large-cap companies often face business risks from potentially disruptive technologies, cyber-threats and climate change, as well as economic and geopolitical uncertainties, to name a few. In addition, major passive investors have become more active and vocal, with some requiring or asking companies to focus on risks and opportunities presented by environmental and social matters such as climate change, diversity and evolving sustainability metrics.
Having a company with strong governance practices can signal to the market that the organization is well managed and, more importantly, that the interests of management are aligned with its stakeholders. Strong governance practices can significantly bolster the company’s reputation, ratings/rankings, competitive advantage and delivery of long-term value for its shareholders.
Best practice tips Well-developed governance practices have also aided many large-cap companies in weathering the storm from the Covid-19 pandemic. In light of the global economic disruption, market volatility and health crisis caused by the pandemic, some top-of-mind issues for many boards and management teams include:
Workforce safety, health and welfare and other human capital management-related issues
Operational/logistical challenges, including sufficiency of the workforce, supply chains and cyber-security protection
Financial stability and allocation of capital/assets
Executive compensation adjustments
Executive succession plans
Risk and crisis management
Regulatory compliance, including disclosure and financial reporting
Shareholder communications, including virtual annual shareholder meetings
Community outreach.
In addition, many companies are mindful of the public concern regarding the death of George Floyd during a police arrest that sparked social unrest and protests against systemic racism and injustice toward black people in the US. Numerous companies have issued statements against discriminatory practices and reviewed their own corporate diversity and inclusion policies and practices.
Through all of this, large-cap companies continue to navigate these challenges and developments, while showing tremendous resilience. Their well-developed yet flexible corporate governance policies and procedures demonstrate some of the best industry practices.