In the case of bank financing, access to capital is mainly driven by variables such as cash-flow projections (an indicator of ability to service debt) and the availability of a security that can be pledged by a borrower. In simple terms, if a borrower doesn’t demonstrate the ability to generate cash-flows in the future or provide a satisfactory security, they are unlikely to access credit from a bank. In the case of capital markets, among the key drivers determining access to capital is projections around your cash-flows and how organized your business is, as represented by your corporate governance practices. The ability to generate cash-flows in the future and sound corporate governance practices are critical to accessing longterm, patient, non-bank capital in the capital markets. In this article. I will be highlighting the role that corporate governance plays in increasing access to capital markets and why business owners and founders need to pay due attention to it.   

What is corporate governance? Corporate governance refers to the system of rules, practices, and processes by which a company is directed and controlled. It involves balancing the interests of a company’s many stakeholders, such as shareholders, management, customers, suppliers, financiers, government, and the community.. The goal of good corporate governance is to ensure that the company acts ethically, fairly, and transparently, leading to sustainable long-term success. 

Sound governance consists of several pillars that ensure a company adheres to rules and regulations imposed by external authorities, as well as meets the unique requirements of internal stakeholders. These pillars may include, but are not limited to:  Accountability, Leadership, stakeholder engagement, transparency, independent assurance, risk management and fairness. Mechanisms to support these pillars include corporate reporting, having in place a board of directors, holding general and extraordinary meetings where shareholders participate in decision making among other mechanisms. While all pillars of corporate governance are important, I will limit myself to Accountability through corporate reporting, transparency as well the role of a board as pillars that business owners and founders ought to lean on, to attract providers of capital to their companies. 

Corporate reporting and transparency as pillars of corporate governance are foundational in nature. Reporting and transparency provide insights to stakeholders on the company’s performance and financial position. Through reporting, providers of capital gain access to a company’s financial and non-financial information and can support them in forming a view on how the business is being managed. Reporting includes information on a company’s operations, strategic objectives, audited financial statements, governance structure, ownership structure, remuneration policies, related-party transactions, and risk factors. Providers of capital can rely on corporate reports and disclosure to: assess company performance and that of its directors and managers; make valuation and investment decisions; and assess a company’s compliance with legal commitments such as debt contracts. 

The board of directors plays a crucial role in a company’s governance, providing oversight and strategic guidance to ensure the company’s success. Shareholders select or elect a board of directors to represent their interests. The board is the policy making organ of a company and its policies are executed by management. The board provides strategic direction and oversight in an organization. Providers of capital look out for aspects around a board of directors before they decide to commit capital. Key among indicators that providers of capital consider include: diversity among board members in terms of skills, experience, expertise, independence and gender; clarity of roles and responsibilities among a board and its committees; proactive risk management; timely and transparent disclosures; and ensuring that a company has strong internal controls.  

In addition to the favorable rating by providers of capital for companies with sound corporate governance, there are other merits. A company with sound corporate governance practices is likely to see its cost of capital come down as capital providers perceive it as being less risky, reducing the risk premium charged on the cost of capital for companies with weak corporate governance practices. Sound corporate governance sends a strong signal that a company is primed for value creation, key to attracting providers of capital. Companies that seek to borrow from capital markets can be given a credit rating, which is an opinion on the ability of a company to pay its debt obligations. Strong corporate governance, can contribute to a company obtaining a favorable credit rating, which is also critical to raising debt capital at a lower cost. Sound corporate governance can enhance brand reputation, which can attract talent and clients, who wish to be associated with well-run and managed companies. 

Given that running an organized business (as represented by sound corporate governance practices) can be a source of business sustainability and long-term creation of value for business owners and founders, what should be the next steps be? Business owners and founders should consult professionals such as lawyers, chartered secretaries and accountants to provide the necessary guidance and advisory on sound corporate governance practices. The Institute of Corporate Governance of Uganda also has several programs that can build the capacity of business owners and founders in matters of corporate governance. Armed with the prerequisite advisory, knowledge and capacity, you should be able take steps that lead to a better organized business in terms of corporate governance practices and ultimately attract capital from both institutional and retail investors.