What is Good Governance?
5 min read
Corporate governance is the system of rules, practices, and processes by which a company is directed and controlled. Good governance is essential for protecting shareholder interests and long-term value creation.
Why Governance Matters for Investors
Companies with strong governance practices consistently outperform those with weak governance. Here's why:
Better Risk Management
Independent boards provide oversight and challenge management decisions, reducing the risk of major strategic errors.
Shareholder Alignment
Good governance ensures management acts in shareholders' best interests, not their own.
Long-term Thinking
Strong boards focus on sustainable value creation rather than short-term gains.
Lower Cost of Capital
Investors are willing to pay more for well-governed companies, reducing the company's cost of raising capital.
The Four Pillars of Good Governance
1. Board Independence
A majority of directors should be independent from management, with no material relationships that could compromise their judgment.
NZX Best Practice: At least 50% independent directors, ideally higher for larger companies.
2. Shareholder Rights
Shareholders should have clear voting rights on major decisions, including director elections, executive pay, and significant transactions.
Red Flag: Director elections with less than 80% support indicate shareholder concerns.
3. Transparency & Disclosure
Companies should provide timely, accurate disclosure of financial performance, risks, executive compensation, and governance practices.
What to Check: Annual reports, NZX announcements, and director disclosures should be detailed and easy to find.
4. Risk Management
Effective oversight of company risks through audit committees, internal controls, and proper board expertise.
Key Question: Does the board have members with relevant industry and risk management experience?
How to Assess a Company's Governance
Use NZXplorer's governance scores and these key metrics to evaluate any NZX company:
Board Composition (40% of score)
- • Percentage of independent directors (aim for 60%+)
- • Average tenure (watch for boards with all long-serving directors)
- • Diversity of skills and backgrounds
- • Number of directors (typically 5-9 for NZX companies)
Shareholder Support (30% of score)
- • Average voting support for director elections (80%+ is good)
- • Support for remuneration policies
- • Proxy voting patterns from institutional investors
Executive Compensation (20% of score)
- • Pay-for-performance alignment
- • Reasonable CEO-to-worker pay ratios
- • Long-term incentives vs short-term bonuses
Insider Activity (10% of score)
- • Director share ownership (skin in the game)
- • Patterns of insider buying vs selling
- • Timing of transactions relative to announcements
Real-World Example: Good vs Poor Governance
Good Governance
- • 7 directors, 5 independent (71%)
- • Regular board refreshment (avg tenure 6 years)
- • 95% average shareholder support
- • CEO pay linked to long-term performance
- • Transparent disclosure of all related-party transactions
Poor Governance Red Flags
- • 5 directors, only 2 independent (40%)
- • Directors with 15+ years tenure
- • Director election at 65% support (contested)
- • CEO pay increased despite poor stock performance
- • Multiple directors on 5+ boards (overboarding)