Signs of a corporate’s poor governance

Governance & Transparency are essential for the longevity of a company. In this blog post, we are going to look at 3 signs that could be indicative of lackluster management. 

Why is corporate governance an important consideration for your investment due diligence?

New investors often get tunnel vision into looking at the financial results of the company and often neglect changes in governance. Good Governance contributes more toward the company’s success than you might realize. Governance influences capital management, growth strategies, talent retention, and execution. A company’s ability to continue to perform is largely attributed to governance. 

Sign 1: Missing long-term goals

Long-term goals, Key business metrics* can be found in the investor deck. Release quarterly in companies 10Q filling. A company can be in one of three stages.

    1. Pivoting into a new market
    2. Competing in their core market
    3. Identifying opportunities or filling up market gaps.

When the term “Restructuring” and “Refinancing” is used, Almost always it is indicative of plans screwing up. Companies that consistently underperform their own guidance should be avoided. As this is one of the most telling signs that management has lost touch with their customers. Investors should take a look at past investor decks to get an accurate reading of the company’s performance. 

Business metrics* is not just financial data but include data like production rate, foot traffic, and New-user signup rate. Important data that is relevant to the company’s business and growth stage. 

Sign 2: Whistleblowers, Abrupt changes in CFOs and Auditors.

Although news on Corporate fraud hardly makes it to the news, it does happen and at a higher frequency than you might think. Frauds on the scale of ENRON are exceeding rare, but markets tend to have a vigorous reaction to any allegation regarding accounting fraud. For retail investors, is it nearly impossible to timely react to the news, before the allegation happens. However, when a stock is suddenly trading at a discount, check for history of “Accounting fraud”.

Sign 3: Too many one-time write-offs & “money leaks” in the footnotes.

Write-offs and money leaks buried in the footnotes are at best a sign of incompetency or at worst criminal activities. Either way it’s a huge red flag. When reading the financial statements, footnotes are your friend as they give context to the numbers.