New Tool Measures Corporate Governance Effectiveness

4 December 2017

New Tool Measures Corporate Governance Effectiveness

A new corporate governance index aims to quantify the voice of the shareholder at the boardroom table.

Produced by the Auckland Centre for Financial Research at AUT, the New Zealand Corporate Governance Index (NZCGI) an independent measure of how well boards of NZX 50 companies are representing the interests of investors.

Good corporate governance, from an academic perspective, is about aligning the interests of shareholders and management. When the interests of shareholders and management diverge it creates the so-called ‘agency problem’.

Because shareholders cannot monitor management day-to-day, they rely on the controls and mechanisms of a good corporate governance system to ensure managers act in a shareholders best interest, says Auckland Centre for Financial Research financial research officer, Alex Medland-Slater.

The NZCGI is not a measure of financial value but companies with good corporate governance are more likely to maximise shareholder value. Investors can include the NZCGI in their investment decision-making process.

“Good corporate governance means management and shareholders are on the same page – maximisation of firm value over the long-term,” says Medland-Slater.

Companies are scored on 17 research-backed measures and the scores are used to create the index. These measures fall under four broad categories:

• Ownership structure

• Board of directors

• Independence

• Remuneration

These broad categories and measures have been shown to be very good indicators of good corporate governance. The data is gathered from public sources meaning it is based on information already available to the average investor.

“As a company can be measured over time any deterioration in corporate governance score in relation to peers or themselves can serve as a warning signal to investors,” says Medland-Slater.

The index will be released annually to allow benchmarking of companies against their peers and own performance over time.

Read the full New Zealand Corporate Governance Index results.

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