Rationale for Good Corporate Governance?

A good corporate governance regime is central to the efficient use of capital. First, it pro­motes market confidence; helps to attract additional long-term capital, both domestic and foreign; and fosters market discipline through good disclosure and transparency. Second, good corporate governance helps to ensure that corporations take into account the inter­ests not only of a wide range of constituencies but also of the communities within which they operate and that their boards are accountable to the company and the shareholders.

Those actions, in turn, help to ensure that corporations operate for the benefit of society as a whole.

The experiences of economic transition and the financial crises in many develop­ing and emerging market economies have confirmed that good corporate governance practices can strongly contribute to financial market development and financial stability. Good corporate governance helps to bridge the gap between the interest of those who run a company and the shareholders who own it, thereby increasing investor confidence and making it easier for companies to raise equity capital and to finance investment. Good corporate governance also helps ensure that a company honors its legal commitments and forms value-creating relations with stakeholders, including employees and creditors (OECD 2003).

Empirical evidence17 suggests that good corporate governance will do the following:

• Increase the efficiency of capital allocation within and across firms.

• Reduce the cost of capital for issuers.

• Help broaden access to capital.

• Reduce vulnerability to crises.

• Foster savings.

• Render corruption more difficult.

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