As the market is flooding with new and emerging unlimited companies, the concerns regarding the regulations are also growing. Research by Deloitte states that 90% of non-listed companies consider corporate governance their priority. What is the need for corporate governance, and why does it hold a high pedestal in the corporate world? What is its importance in unlisted companies? All such questions will be answered in this blog.
The aspect of corporate governance is a holy grail that companies abide by. Not only companies with shares listed in the stock market but companies with unlisted shares in the stock market also try to govern by the concept of corporate governance. Before highlighting its importance for unlisted companies, it is crucial to have a firm grip on corporate governance.
What is Corporate Governance?
“Corporate governance is defined as the system by which business corporations are directed and controlled. Indeed, the corporate governance structure specifies the distribution of rights and responsibilities among different participants in the company, such as the board, managers, shareholders, and other stakeholders, and spells out the rules and procedures for making and monitoring decisions on corporate affairs. Doing this also provides the structure through which the company objectives and strategy are set and the means of attaining those objectives and monitoring performance” (OECD 2004).
A company comprises stakeholders, from the managing board, customers, and employees to clients and suppliers. Defining their roles and protecting their interests is a cause of concern. The subject matter of corporate governance includes companies following a system of rules and regulations to govern and control business enterprises. It creates a list of rules, codes, and laws that are significant in managing the internal and external functioning of the companies.
Why is Corporate governance important for unlisted companies?
The features of corporate governance are equally important for regulating both listed and unlisted companies, but there are certain features that make corporate governance important for companies with unlisted shares:
The main area of corporate governance is the regulation of the decision-making processes. When the source of autonomy is diverse and decision-making digresses in multiple hands, the regulation becomes a cause of concern. As companies with unlisted shares embark on the journey of growth, the financing, funding and organisation fall into multiple hands, making it essential to lay down guiding principles that ensure the smooth functioning of the decision-making processes.
The source of financing is also a concerning factor that initiates the need for governance in unlisted companies. As the sources of financing grow and autonomy is diverted to external sources like banking institutions and venture capitalists, the need for having principles that guide the autonomy rises.
Protecting The Shareholder’s Interests:
The lack of government-backed support in the buying and selling process of unlisted shares makes it a risky game for investors and shareholders to dive into the game. Ensuring that shareholders have a framework they can rely on in case of any discrepancy can give a sense of security to the shareholders.
Since shares of unlisted companies are not traded in public equity markets, unlike those of listed companies backed by strong policy support, the inclusion of corporate governance in the domain of unlisted companies provides them reassurance and security while dealing with buying and selling unlisted shares.
Role Of Corporate Governance In Unlisted Companies
A publication by the Organisation For Economic Cooperation and Development (OECD) highlights the aspect of corporate governance of non-listed companies and re emphasises the crucial aspect of regulating and functioning of the unlisted companies under the domain of corporate governance.
The organisational structure of companies with unlisted shares differs from those of listed companies. So, different sets of rules and regulations are necessary to control and manage the functioning of such companies. A corporate governance framework that takes care of both internal and external shareholders’ interests and provides suitable guidelines in respect of the jurisdictions, laws and financial reporting of the companies is what makes a good governance strategy for companies with unlisted shares.
The measures of corporate governance for controlling internal and external mechanisms can be beneficial not only in regulation but in propelling future growth and progress for the unlisted firms.
Universal corporate governance rules for unlisted companies are a bit tricky to pen down as the domain of unlisted companies varies from small homegrown businesses to joint ventures and state-owned companies that have different organisational structures, different business goals, and patterns of ownership. Though there are disparities, there are a few principles that stay constant in governing and managing when it comes to companies with unlisted shares.
The growth potential of unlisted companies is exponential, and the rules of corporate governance overseeing the companies make it a safe option to generate good returns. If you also want to buy unlisted shares in India and make good profits from this growing market, then Stockify will be a one-stop solution for your investing needs. A leading unlisted shares platform, Stockify can provide access to stocks of unlisted companies in India without any hidden charges and well-researched evaluations.