Corporate governance involves all the methods a corporation uses to protect its investments and the interests of its financiers. This includes a thorough definition of the company's infrastructure from how it is directed from the executive level all the way down to entry-level employees. The risk of non-compliance to a company's corporate governance strategy or structure can lead to a lack of confidence in the company and decrease its growth potential.
Loss of Shareholder Confidence
A company that does not adhere to its corporate governance strategy runs the risk of weakening the confidence of its shareholders. This may happen because shareholders feel mislead about the company's organizational structure and business strategy. If shareholders believe bad business decisions are in the company's immediate future, they may begin to sell company stock to avoid a potential loss. A large sell-off of company stock can lead to falling stock prices which diminishes the overall value of the business.
Difficulty Raising Capital
When a corporation's stock value diminishes, it becomes more difficult for the company to raise capital. This is due in part to a negative perception of the company created by a lack of adherence to its corporate governance strategies. Basically, the view from outside the corporation is the business lacks sufficient infrastructure to make fiscally intelligent decisions. Potential investors may stay away from a company with a low stock value and lack of adequate corporate governance because of a greater risk of losing money.
No Risk Management
Non-compliance in corporate governance may lead to a lack of risk management within a corporation. This may lead a company into bad investments including extending credit to those who may not be able to pay such an extension back. A large amount of risk-laden investments not only hurts the company but may put its ability to repay its own creditors at risk. This can lead to a domino effect of credit defaults which can cripple a corporation and hurt business in other industries with investments tied to the floundering business.
Increased Government Oversight
A corporation with a reputation for lack of adherence to corporate governance strategies may incur increased government oversight from departments looking to verify that the company is operating within the bounds of the law. Oversight may include reviews of business practices including employee pay and relations, quality of manufacturing facilities, impact of business practices on the environment, legality of all investments and honest reporting of all profits, debts and losses. A corporation found to be in violation of government regulations may face fines or even criminal penalties for its executives.