Governance Red Flags
7 min read
Warning signs that indicate poor governance practices and increased investment risk. Learn what to watch for when evaluating NZX companies.
Why Governance Red Flags Matter
Companies with poor governance are statistically more likely to experience accounting scandals, regulatory issues, value destruction, and underperformance. Identifying these warning signs early can protect your investment portfolio.
10 Major Red Flags to Watch For
1. Low Board Independence
CriticalLess than 50% independent directors, or a board dominated by management or controlling shareholders.
Examples:
- • Only 2 independent directors out of 7 total
- • CEO also serving as Board Chair
- • Multiple family members on the board
- • Directors with significant business relationships with the company
Why it matters: Without independent oversight, the board cannot effectively challenge management or protect minority shareholder interests.
2. Very Low Shareholder Support
CriticalDirector elections or remuneration votes receiving less than 75% support.
Examples:
- • Director re-elected with only 65% votes for
- • Executive pay policy rejected by shareholders
- • Declining support over multiple years (95% → 85% → 72%)
- • Multiple resolutions with low support at same AGM
Why it matters: Indicates serious shareholder concerns about governance, strategy, or compensation practices.
3. Excessive or Misaligned Executive Pay
HighCEO compensation that seems disconnected from company performance or shareholder returns.
Examples:
- • CEO pay increased 30% while stock fell 20%
- • Pay significantly above peers with similar market cap
- • Large bonuses paid despite missing financial targets
- • Stock options granted at favorable timing
Why it matters: Suggests weak board oversight and misalignment between management and shareholder interests.
4. Board Entrenchment
HighDirectors serving for very long periods (10+ years) with no board refreshment.
Examples:
- • Average board tenure of 14 years
- • No new directors added in 5+ years
- • All directors have served 12+ years together
- • Directors past typical retirement age (75+) with no succession plan
Why it matters: Entrenched boards can become complacent, lose objectivity, and resist necessary changes.
5. Heavy Insider Selling
HighMultiple executives or directors selling large portions of their holdings.
Examples:
- • CEO sold 80% of shareholding over 3 months
- • 4 directors all selling within same quarter
- • Selling before profit warning or bad news
- • Pattern of executives exercising options and immediately selling
Why it matters: May indicate insiders lack confidence in future prospects or have non-public negative information.
6. Frequent Related-Party Transactions
HighRegular business dealings between the company and directors, executives, or their affiliates.
Examples:
- • Paying $500k/year to law firm where director is partner
- • Leasing property from company controlled by major shareholder
- • Consulting fees to former CEO still on board
- • Loans to directors or family members
Why it matters: Creates conflicts of interest and opportunities for self-dealing at shareholders' expense.
7. Overboarded Directors
MediumDirectors serving on too many boards to effectively fulfill their duties.
Examples:
- • Director serves on 7 different company boards
- • Chair also chairs 2 other companies
- • Multiple directors with 5+ board seats each
- • Directors frequently missing board meetings
Why it matters: Directors without enough time cannot provide proper oversight or prepare adequately for board meetings.
8. Lack of Transparency
HighCompany provides minimal disclosure or makes information hard to find.
Examples:
- • Annual report lacks detail on executive compensation
- • No disclosure of individual director voting results
- • Vague or delayed NZX announcements
- • Board committee composition not disclosed
Why it matters: Lack of transparency often indicates something to hide and prevents proper investor analysis.
9. Weak or Missing Audit Committee
CriticalNo audit committee, or one dominated by non-independent directors.
Examples:
- • Audit committee has only 1 independent member
- • No financial expert on audit committee
- • Audit committee chair is also CEO
- • Company changed auditors multiple times in short period
Why it matters: Increases risk of accounting irregularities, financial misstatements, and fraud.
10. Poison Pills and Anti-Takeover Provisions
MediumConstitutional provisions or strategies that make it difficult for shareholders to effect change.
Examples:
- • Staggered board elections (only 1/3 up for election each year)
- • Supermajority voting requirements for changes
- • Excessive director termination payments
- • Restrictions on shareholder ability to call special meetings
Why it matters: Entrenches management and makes it difficult to remove underperforming directors or pursue strategic alternatives.
What to Do When You Spot Red Flags
Assess severity: One minor red flag might be acceptable, but multiple red flags or critical ones (low independence, low shareholder support) warrant serious concern.
Investigate further: Read annual reports, AGM results, proxy advisor reports, and news articles to understand the full context.
Compare to peers: Use NZXplorer to compare governance metrics against similar companies in the same sector.
Consider your risk tolerance: If governance concerns are significant, it may be best to avoid the investment or reduce position size.
Monitor for improvement: If you hold the stock, track whether the company addresses governance issues over time.