Rationale for the CGRS
Research has consistently confirmed that businesses with better governance practices, on average perform better than their peers on other business measures. For example;
- A study by Korean and US researchers finds that a well-governed firm in Korea traded at a premium of 160 percent to poorly governed firm.
- An ABN/AMRO study demonstrates that Brazil-based firms with the best corporate governance ratings garnered 2004 P/E ratios that were 20% higher than firms with the worst governance ratings.
- A study of Russian firms shows that a worst-to-best improvement in corporate governance predicted a huge 700-fold (70,000%) increase in firm value.
- A Harvard/Wharton study shows that if an investor bought shares in US firms with the strongest shareholder rights, and sold shares in the ones with the weakest shareholder rights, that investor would have earned abnormal returns of 8.5 percent per year.
Also, improvements in corporate governance practice increases investor confidence and engenders access to cheaper funds. According to the IMF-Capital Markets Consultative Group ‘The investment regime and the environment for business ranked second in order of importance among factors determining foreign investment location’.
Advantages for participating companies
- Through the CGRS companies can enjoy commercial advantages by attracting risk-averse or socially responsible business partners – both on a national and international level). This is especially important, as doing business in Nigeria is perceived as a high-risk venture due to the country’s high level of corruption.
- Nigerian companies that can demonstrate good governance practices can set themselves apart from their local peers and become much more attractive to inventors or international companies seeking local business partners.
- Such business advantages can come from investors through accessing capital and reducing the cost of financing by helping external financing institutions to assess risk premium through enhanced information or from other business partners by obtaining a competitive advantage as a preferred choice of risk-averse or ethically concerned customers, suppliers and other stakeholder.