Good governance is for everyone and makes business less risky

Good governance is for everyone and makes business less risky


The persistence of uncertainty and the intensification of the risks which our companies are exposed to threatens the recovery after the pandemic, and could also slow down the sustainable transformation underway.

As it emerges from the 2022 Report of SDA Bocconi Corporate Governance Lab, uncertainty accelerated changes in in top management structures which had already been occurring in recent years. Considering a large sample of 5,400 firms, the report investigated the role of governance in helping entrepreneurs stay the course in the face of mounting challenges and adversities.

At the end of 2020, 14.3% of the companies under investigation had improved one or more key aspects of their governance both in terms of structure and of the mix and profile of skills represented. Specifically, 182 companies have opened up their Boards of Administration, introducing 298 new external board members bringing heightened skills in finance and accounting, as well as in risk management and ESG. Furthermore, in 229 of the firms monitored, the diversity index significantly improved, in terms of gender and also in terms of age and geographical origin. There is also an important evolution in structural aspects, with 79 companies abandoning the sole administrator model in favor of the establishment of a board, 377 companies separating the positions of President and CEO, and another 251 overcoming the collegial leadership model in favor of unified and clear business leadership.


A second important result confirms the importance of governance for corporate results in terms of resilience. Even in the context of the 2020 generalized decline in sales, the companies that worked to improve governance contained both turnover loss (-6.8% with respect to -8.7% in companies with unchanged governance), and decrease in profitability (decrease in ROA of 0.9 percentage points compared to -1.4 in the case of unchanged governance).

But our third finding is perhaps the most important: the role of governance in risk management, a crucial aspect in overcoming a succession of shocks that promises to last for a long time. The analyses show that, although companies tend not to consider risk in their localization choices, the presence of structured governance significantly mitigates this risk. In other words, good governance seems to be able to "reassure" the entrepreneur in making investments in low-risk countries (political, credit, climate risk), increasing their likelihood all other conditions being equal. On the other hand, and more importantly, structured governance reduces by a third the likelihood of deciding an investment in  a country with high political and credit risk, and by a hefty 90% the probability of making an investment in a country with high climate risk.

From this and other studies on the subject, there is also another aspect that emerges: we need to discard once and for all the idea that good governance is necessary and useful only for listed companies, while it would lead to cost increases in entrepreneurial realities. Such objection is vitiated by the fact that it is necessary to clarify the objectives of good governance, which are inevitably different in the context of unlisted companies. In this case, governance should play a guiding role in supporting the entrepreneur, also being proactive with respect to the evolution of the company and its property structure.

The need to reiterate the importance of governance in these contexts is also evident in the growing pressure of soft law not only in Italy but also in many other European countries: examples are the Wates Code ("Corporate Governance Principles for Large Private Companies") in the UK, as well as various experiences in Italy (such as the Corporate Governance Framework of Elite in 2019 and the Governance Code created by Bocconi and AIdAF in 2017, “Principles for the corporate governance of unlisted family-owned companies "). In March 2021, then, a first example of European guidelines was produced by EcoDa (the European association of independent corporate board members), titled "Corporate Governance Guidance and Principles for Unlisted Companies in Europe" which is being adapted to the Italian context. EU legislative and regulatory changes in the ESG field are also foreseeable, threading in the footsteps of an already vast body of environmental regulations. In any case, hoping that this will happen out of deep conviction rather than mere compliance, in the next few years companies will have to be ready to make a qualitative leap in governance, which is set to even more important and decisive than the recent past.

by Alessandro Minichilli, Full Professor of Corporate Governance

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