Does corporate governance pay?

Does corporate governance pay, even if your company is not seeking outside investors? It does, especially when dealing with competitors. When I was traveling in Serbia in November, I met with some company managers who said their firms were not too worried about corporate governance.

Their firms were not looking for funding from outside investors, they said. Any growth capital they needed could come from either their own resources (i.e., retained earnings) or from bank loans. If they are not trying to lure funds from domestic or foreign investors, they said, why do they have to worry about financial transparency or upgrading their board practices?

The answer to that question is simple: their competitors will eat their lunch. There are larger, more efficient firms from all over Europe, with deeper pockets and more marketing muscle ready to snap up the Serbian companies' customers. By not upgrading their corporate governance standards, the Serbian firms are, in effect, operating with one arm tied behind their backs when they are competing with larger, better-funded rivals.

Their complacency gives their competitors a big advantage. An example of a manager of a small firm who used corporate governance to become more competitive is Mo Ibrahim, founder of Celtel. Instead of hiring family members or close friends, Mo employed the best managers he could find in the market. He also instituted an impartial board of directors who would tell him what they really thought about his decisions. Mo's decision to use good corporate governance practices worked—he recently sold the company for $4 billion.