Corporate governance 2006: Caveat creditor
While the current stage in the leverage cycle benefits corporate borrowers, concern has been raised about the protection that bondholders receive against declining ratings and event risk. Does good corporate governance have anything to offer this set of stakeholders, and should it have? Florian Neuhof reports.
ARE BONDHOLDERS GETTING their due from efforts to improve corporate governance? “As corporate governance specialists, we don’t often look much at the interests of creditors,” says David Paterson, head of research at RREV, a provider of corporate governance services. Paterson’s rationale is simple, and reflects the consensus among his colleagues: corporate governance is there to ensure that shareholders, as owners of a company, are able to protect their interests against failings at management level. Furthermore, shareholders are the main bearers of risk, they stand to lose their assets if a company defaults since they are subordinated to creditors.
Paterson argues, though, that the interests of debt and equity are aligned a lot of the time. “Good corporate governance is in the interest of both bondholders and shareholders,” he says, “as the basic pressure exerted on the management is on improved accountability, which should be of value to all stakeholders.” Long-term investors especially are keen to ensure the long-term sustainability of a company, which includes a healthy balance sheet.
However, in the present liquid credit environment, companies are borrowing at record levels and event risk is increased through strong M&A and LBO activity.