What is a corporate governance Index?

Corporate governance, from an academic perspective, is the mechanism that attempts to mitigate the agency problem between the owners of a listed company (shareholders) and the operators (management). This is achieved by aligning the interests of both parties and by monitoring the actions of management.

There is a deep pool of academic research into what makes good corporate governance, for example independence of the board of directors and appropriate remuneration of the CEO and management. It can be difficult to judge a company's corporate governance on one measure alone.  Therefore the Auckland Centre for Financial Research has created the New Zealand Corporate Governance Index (NZCGI), the first of its kind in New Zealand.

A corporate governance index combines a number of measures known to be good indicators of good corporate governance and quantifies the data for each measure. A score is then assigned based on the measure and the scores are combined to create an index.

The advantage of a corporate governance index is it allows comparison of the corporate governance mechanism of companies. When an investor has more than one company to invest in they can use the NZCGI to compare companies and use this information in the investment decision-making process. As a company is given a score each year, an investor can also compare the same company over time.  Any changes in corporate governance policy can be seen and factored into the investment process.

The NZCGI covers NZX 50 companies and therefore provides valuable information on corporate governance to those looking to invest in New Zealand companies.