A colleague and I were talking about corporate governance promotion this morning. We were lamenting the difficulties that could lie ahead as skepticism over Wall Street’s recent collapse spreads through emerging markets. Surely the failure of financial markets and investors to adequately appraise risk detracts from the arguments we make about the role corporate governance plays in encouraging investment, we asked ourselves. However, an alternative scenario quickly came to the mind; the importance of sound corporate governance is now going to be more vital for than ever.
The financial crisis has not only tightened up available funds on global financial markets but also has caused shrinkage in bank lending (traditionally the first port of call for local companies seeking finance in emerging markets). With increased supervision of the financial sector on the horizon, and Basel II guidelines calling for more effective evaluation of risk, the “market” for improved corporate governance standards may be set to grow.
The financial collapse of 2008 is based in the failure of lenders and investors to adequately control for risk in the decisions they have made. In future the soundness of a company’s governance systems and internal controls will become a more important factor when making investment decisions. It will be interesting to watch the financing trends in places like Russia, where the financial markets have suffered from a variety of self-inflicted wounds lately, and the domestic credit market has dried up. Will Russian banks reward good corporate governance as a risk-reducer? Let’s hope so.
Published Date: September 22, 2008