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Corporate Governance

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The Two Thin Lines

Now that we have a brief idea on Corporate governance. We will discuss the differences between a company's owner or shareholders from its management and how corporate governance has a major role in it. 

The thematic discussion behind Corporate Governance rests on the point that Ownership should be separated from control. This means that the owners of a company are those who own that company's stock & the management are merely their well-paid employees. It should be noted that the people running the company are elected representatives of the shareholders. It is neither plausible nor possible for the varied, numerous & dispersed shareholders to come together & manage the company's day-to-day affairs. Hence, full-time management is essential for the working of public companies & talented management is a valuable asset to an organization.

Corporations pool capital from a diverse investor base both in the domestic & international capital markets. In this context, investment is ultimately an act of faith in the ability of the company's management. When an investor puts his money in a corporation, he expects the board & the management to perform their fiduciary duties such as ensuring the safety of capital & also achieving a rate of return that is higher than the cost of capital. In this framework, investors expect management to act ethically & in their best interests at all times.

Companies can either be family-run or professionally managed. Let us discuss them in greater detail:

Q: What is meant by family control?

- Family control may constitute equity ownership, board representation, or senior management positions. It amounts to the degree to which the family exerts influence in the strategic direction & management of a company.

Q: What are the benefits of investing in family-controlled businesses?

  • The background advantage - In maximum cases, the current & future employees of such businesses have been immersed in that environment since they were toddlers. This exposure gives them an intimate understanding & awareness of the firm's business model. Such expertise may be difficult to imitate by outsiders. 
  • Experience matters-  Seasoned management have tackled several industry cycles in the past & know the appropriate plan of action to steer the company through difficult times. It is aptly said that a strong family background gives rise to world-class entrepreneurs.
  • Low employee turnover is another calling card of family-controlled businesses. It beckons for higher productivity and a robust corporate culture. The shared long term vision & ethos adds further brownie points.
  • Prudent decisions- Family-owned businesses are known for their conservative nature. They are less likely to be overleveraged or indulge in accounting gimmicks.

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