G.O.V.E.R.N. Framework

Non-GAAP, 2020-11-03

  • Helps with integrating corporate governance into the investment process.

  • Stands for: Greed, Opportunity costs, Valuation, Executives, Referendum, Narrative.

  • The glue of all these components is compensation, of course.


  • Greed is not bad in itself, what makes a difference is the object of this greed.

  • Financial investors’ greed when they try to offload a big chunk of their holdings, thus damaging the stock price and generally – the company’s prospects – is bad for everyone but the said investors.

  • The greed for power and reputation may turn an insider into a narcissist pleasing not just internal stakeholders, but also actively creating external CxO / Directorship opportunities.

  • Empire building / hoarding cash for the purpose of having more M&A opportunities (meaning more power) or having misaligned compensation incentives is also a result of greed.

  • So the key task is figuring out what the insiders are greedy about as this will explain what drives their decisions.

  • Aggressive equity grants and changes in cash/equity comp sends strong signals on insider sentiment and performance expectations.

Opportunity Costs

  • Governance is about managing opportunity costs and trade-offs. (To understand opportunity costs better you can read a complex but incredible useful book “Economics in Two Lessons” by John Quiggin).

  • Greed is linked to opportunity costs in a way that narrowing the opportunity costs for the management (especially around comp) means widening them for investors.

  • Not rocking the boat (i.e. not taking enough risks) can be considered a risk-averse behaviour of the management to the detriment of the long-term company interests.

  • Asymmetrical risk profile (good capital decision == managers get bonuses; bad decision == shareholders foot the bill) is another example.

  • Lowering targets for the sake of bonuses and indexing the payout based on overachieving targets is yet another way of almost risk-free value transfer from shareholders to execs.

  • The “quality” of capital allocation goes hand in hand with managing opportunity costs by the Board.


  • Increasing stock price helps (and encourages) aggressive M&A (since it’s cheaper for the buyer and still valuable to the seller) or increased CAPEX.

  • Boards encourage this risk-taking behaviour and swap options for performance shares (i.e. higher total payout to the management).

  • Valuation is one of the key drivers of the changes in exec comp, and it reflects the perception of the Board regarding the planned outcomes.


  • A company’s government structure resembles the comm and org power structure that produced it. In other words, the positional and information powers play a big role in defining who gets what.

  • The exec comp structure is the best indicator of the Board dynamics; corp governance structure and practices tell a lot about the execs and their values.

  • The dark arts are quite visible when the performance goalposts are moved by the Board in the management’s favour and towards their preferred strategy.


  • Directors (believe it or not) are elected now and then. And activist investors can really make changes.

  • The question is: do execs and the incumbent Directors entrench themselves (looking for the sources of power to keep it) or do they (maybe) listen?

  • On the other hand, if things go well, are there obvious red flags being ignored for the sake of keeping the growth going and not rocking the boat?


  • The Board communicates the company’s narrative (i.e. the “North Star”) to the world. It’s a brilliant PR/IR exercise, but is the company really going for it? Are the execs being judged based on the alignment with the path to reach this North Star?

  • A narrative that stays the same for a long time is outdated and thus should be discounted; a change (hopefully towards something more realistic) is something to look carefully into.