Corporate governance is a rebuttable presumption that things are on the right track in an organisation.
This is because corporate governance by its very definition comprises structures and processes put into place in an organisation by which companies are directed and controlled. As such, there is a presumption that things are proceeding on the right track -there is no guarantee that all will be well.
Companies can indeed collapse despite having what appear to be robust corporate governance practices in place.
While effective governance is crucial for the long-term success and sustainability of a company, there are several factors that can contribute to a company's collapse despite having seemingly sound governance practices.
External Economic Factors: No matter how well-governed a company is, it operates within a larger economic environment that can impact its performance.
Economic recessions, fluctuations in currency exchange rates, changes in government policies, and shifts in consumer behaviour can all significantly affect a company's financial health, regardless of its governance practices.
Market Dynamics: Industries can experience rapid changes due to technological advancements, shifts in consumer preferences, or disruptive innovations.
Even with strong governance, a company may struggle to adapt quickly enough to these changes, leading to a decline in competitiveness and eventual collapse.
Leadership Failures: Corporate governance relies heavily on the competence and integrity of the company's leadership, including the board of directors and senior executives.
If these leaders make poor strategic decisions, engage in unethical behaviour, or fail to effectively manage risks, the company's performance and reputation can suffer, ultimately leading to its downfall.
Financial Mismanagement: Despite governance mechanisms designed to ensure financial transparency and accountability, companies can still experience financial mismanagement.
This might include fraud, embezzlement, or unsustainable debt levels, which can undermine investor confidence and lead to a loss of shareholder value.
Culture and Ethical Issues: Even with strong governance frameworks in place, corporate culture plays a crucial role in shaping employee behaviour and decision-making.
A toxic culture that prioritizes short-term gains over long-term sustainability, or one that tolerates unethical behaviour, can ultimately erode trust both internally and externally, contributing to the company's collapse.
Lack of Innovation: Companies need to continually innovate to stay relevant and competitive in today's fast-paced business environment.
However, a company with rigid governance structures or a risk-averse culture may struggle to foster innovation effectively, leading to stagnation and decline, especially in industries where innovation is paramount.
Failure to Adapt to Change: Even with robust governance practices, companies can fail if they are unable or unwilling to adapt to changing market conditions, regulatory requirements, or technological advancements.
This inflexibility can leave them vulnerable to disruption by more agile competitors.
Poor Risk Management: While corporate governance frameworks typically include risk management processes, companies can still collapse if they fail to adequately identify, assess, and mitigate risks.
This could include risks related to supply chain disruptions, cybersecurity threats, regulatory compliance, or environmental sustainability.
Overreliance on Key Individuals or Clients: Sometimes, companies become overly dependent on key individuals, such as a charismatic CEO or a star performer, or on a small number of major clients or contracts. If these individuals leave or if the company loses these clients, it can have catastrophic consequences, regardless of the strength of its governance practices.
External Shocks: Finally, companies can collapse due to unforeseen external shocks such as natural disasters, geopolitical conflicts, or global pandemics.
While effective governance can help companies better withstand such shocks, they can still have profound and sometimes fatal impacts on a company's operations and financial stability.
While robust corporate governance is essential for mitigating risks and ensuring accountability, it is not a guarantee of a company's success or immunity from collapse.
Companies can still fail due to a myriad of internal and external factors, ranging from economic downturns and market dynamics to leadership failures, financial mismanagement, and cultural issues.
Therefore, its crucial for companies to not only implement strong governance practices but also to remain vigilant, adaptable, and responsive to changing circumstances in order to thrive in today's volatile business environment.
The internal factors are within the control of the board and management. It is incumbent on every organisation to seek out the best of the four pillars of corporate governance – the board, the C-suite management, external auditors and internal auditors.
And in their efforts to seek the best, we must discard the mentality of bargaining for the cheapest. Quality comes at a price – like every other thing in life. This is an immutable truth.
The idea will be to pay fair price for fair value. The cheapest is not necessarily the best.
As for the external factors, some risks may be reasonably foreseeable while others may completely blind-side us like the Covid pandemic. As with the basic tenets of risk management, there will always be a sediment of residual risk.
The idea then is to minimise this residual risk to palatable levels according to our risk appetite.
*The writer is a former chief executive officer of Minority Shareholders Watch Group and has over two decades of experience in the Malaysian capital market
