Why might a company be considered at risk of governance failure?

A company may be considered at risk of governance failure if it does not adhere to legal and ethical standards because governance involves ensuring that the organization operates within the framework of laws, regulations, and ethical norms. Compliance with these guidelines is fundamental to maintaining accountability, transparency, and integrity within the organization. When a company fails to uphold these standards, it can lead to significant risks, including legal penalties, loss of reputation, and erosion of stakeholder trust.

Governance failure can stem from unethical practices or illegal activities that jeopardize not only the company's own stability but also that of its stakeholders. Thus, the lack of adherence to legal and ethical standards is a clear indicator of potential governance failure, making the company vulnerable to various risks that can derail its performance and sustainability over time.

In contrast, other factors—such as high employee turnover rates, a strong corporate culture, or increasing profits—do not inherently indicate a risk of governance failure. For example, a strong corporate culture can actually support good governance by aligning the organization’s values with ethical conduct. Similarly, increasing profits might suggest that a company is succeeding operationally, rather than signaling any governance issues.