Sometimes a stock appears cheap but keeps falling in price—this is a "value trap." Often, the root cause lies in poor corporate governance. This article shares a checklist to help us identify red flags that may signal governance risks.
Manifestation: Companies hold assets through layers of subsidiaries with complex ownership relationships that are difficult to penetrate.
Risk: This may be used to hide debt, transfer profits, or conduct unfair related-party transactions. Transparency is the cornerstone of good governance.
Manifestation: Company changes multiple auditors in a short time, or audit reports contain "qualified opinions" or "disclaimer of opinion."
Risk: This usually means serious disagreements between the company and auditors on accounting treatments. A healthy company shouldn't fear independent external audits.
Manifestation: Large volumes of transactions between the company and other companies controlled by management, major shareholders, or their relatives.
Risk: These transactions' prices and terms may not be fair, serving as common means for "tunneling" company benefits to insiders. We need to focus on the necessity and fairness of these transactions.
Manifestation: Executive compensation severely disconnected from company performance; frequent changes to accounting estimates (like depreciation years) to "beautify" profits.
Risk: This indicates management may be more concerned with short-term stock prices and personal interests rather than the company's long-term healthy development.
Manifestation: Most board members are company executives, founding family members, or their friends, lacking truly independent external directors.
Risk: An independent board is key to supervising and balancing management. Without independence, the board may become a "rubber stamp."
Investment isn't just about analyzing financial statements—it's also investing in "people," specifically management integrity and competence. Learning to identify these governance risk signals helps us avoid "traps" most likely to destroy value.
What other corporate governance warning signals do you know about? Share your experiences with governance analysis.
[For educational and discussion purposes only]
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