How Corporate Governance Impacts Credit Risk
Corporate governance can have a huge impact on credit risk. This is because corporate governance is the set of rules which is used to manage the interests of various stakeholders in the company. However, many times these interests can be incompatible with one another. For instance, when a company is approaching bankruptcy, the interests of the shareholders and the debtholders are usually opposed to each other.
However, in most parts of the world, the objective of any company is said to be the maximization of shareholder value. This can lead to the interest of other stakeholders such as employees, creditors, and even the government being held subservient to the shareholders. The basic idea behind corporate governance is to ensure that when a group of investors invests their money in an organization, they should be given fair treatment.
In this article, we will have a closer look at some of the common ways in which the lack of corporate governance negatively impacts the debtholders.
How Can Lack Corporate Governance Impact Debtholders?
The lack of corporate governance can impact debt holders in many ways. A couple of famous examples have been mentioned below:
The job of the corporate governance team is to ensure that an environment of constructive criticism is created between the shareholders and the debtholders. Both groups should be able to reasonably criticize each other within the framework of the risk policy of the government. The end result would be that a balanced approach to credit risk would be followed. The creditors will prevent too much risk-taking while the shareholders will prevent playing to too safe.
In the absence of proper corporate governance, the interests of any group will be sacrificed which will lead to problems that will persist for several years in the future. The corporate governance team has to create a framework wherein opposing parties can find common ground and can steer the company in the right direction.
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