The system of rules, practices, and processes by which a company is directed and controlled — the mechanisms that align management decisions with shareholder interests.
Deeper Explanation
Governance quality determines whether management wealth and shareholder wealth are aligned or in conflict. Red flags include: dual-class share structures that insulate founders from accountability; boards dominated by insiders or management nominees with limited independence; excessive executive compensation disconnected from long-term returns; related-party transactions not at arm's length; and audit committees without genuine financial expertise. Buffett has repeatedly walked away from investments despite attractive valuations when governance quality was poor — arguing that a business partnership with a dishonest manager is not one he wants regardless of price. Governance quality is especially important in emerging markets where regulatory protections for minority shareholders are weaker.
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