A 6-step guide to assess corporate governance for retail investors

The separation of management and ownership within the company structure gives rise to an agency problem — the conflict of interest between the company's management and its stockholders. In numerous past instances, management decisions have prioritised personal benefit over minority shareholders' interests. Subsequently, when news surfaces revealing possible mismanagement within the company, share prices plummet.

To mitigate such risks, investors should scrutinise the following reports, which are indicators of corporate governance:

1. Secretarial : This report highlights applicable laws and regulations, as well as significant events affecting the company's affairs, including any breaches of law or issued to the company.

2. Statutory Audit Report: In addition to expressing an opinion on the fairness of financial statements, this report may include a section on key audit matters, emphasising matters deemed crucial by the auditor and communicated with management and the board of directors. Emphasis of matter and material uncertainty over going concern paragraphs may also be included if necessary.

3. Internal Audit Report: This report evaluates the adequacy and operating effectiveness of internal controls within the company. However, management may restrict the scope of internal audits.

4. Corporate Governance Section of the Annual Report: This section outlines the composition of the board of directors, including the mix of independent and non-executive directors, managerial remuneration, the presence of a risk management committee, and its responsibilities, as well as the codes, policies, and frameworks deployed within the company.

5. Related Party Transactions: This report discloses transactions with entities in which management has a significant interest, ensuring transactions are conducted at arm's length prices and that there is no misallocation of company resources.

6. Legal and Regulatory Notices Filing with : Companies disclose notices received from regulatory authorities, detailing violations, supervisory actions, penalties imposed, and their impact on the company's operations. Additionally, the outstanding litigation section in offer documents provides details of ongoing cases against the company and its promoters.

Considering correspondence and notices from regulatory authorities becomes even more critical when investing in the banking and financial services sector, where public funds are at stake in the form of deposits, and the ability to conduct business depends solely on regulatory licences.

Companies should establish robust policies and procedures to safeguard entity assets, including stringent internal controls for sensitive operations and a maker-checker supervision mechanism. These practices enhance investor confidence in management's ability to generate higher earnings, potentially resulting in the company being assigned a higher P/E multiple by the market. Furthermore, companies with good corporate governance practices may receive higher credit ratings, making fundraising activities easier.

An investor focused on long-term investments should never overlook lapses in corporate governance. Conversely, by closely monitoring the aforementioned indicators of corporate governance, investors with risk taking ability may identify potential management lapses and strategically take short positions ahead of market movements to their advantage.

Just as a prudent driver prioritises safety, a savvy investor prioritises corporate governance checks in investment decisions.

Technical Outlook:

The previous week, the index displayed a wide range of movements, showcasing considerable volatility. Despite reaching a new high at 22,795, profit booking led to a moderate gain, closing the week at 22,476, up 0.25%. The domestic market exhibited resilience even amidst a weaker global sentiment.

Nifty holds above the 50-day Simple Moving Average (SMA) while the Relative Strength Index (RSI) remains above the crucial 50 levels indicating positive momentum in the market.

However, a double top formation on the daily chart suggests potential short-term weakness. The Fibonacci retracement levels at 22,285 and 22,165 are anticipated to provide crucial support levels for the market in the coming week.

Sectorally, the Nifty PSE sector emerged as the top performer, surging by an impressive 3.94%. Conversely, the Nifty IT sector experienced a decline of 2.25%.

Short-term investors should be cautious due to the rising (14.62).