Does your stock suffer from governance issues? Here are 10 hidden red flags!

No investor would invest in a company with governance issues, but it can be difficult to spot red flags. That is why we decided to write this article – to help investors determine them. Because we have seen these happen so many times over the years in so many companies as red flags that there were issues, and these often spilled over even if at times it looked like the signs were non-issues.

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10 red flags that show your company has governance issues

1. Financial reporting that feels technically compliant but hard to understand

If results are full of “adjusted” numbers, unusual definitions of cash flow, or constant exclusions that change year to year, that’s often management shaping the story rather than letting the numbers speak. When statutory profit is weak but “underlying” or “pro forma” metrics are always strong, governance risk quietly rises.

2. Cash not matching the story

Revenue growth that doesn’t translate into operating cash flow, or recurring capital raises despite claimed scalability, suggests either poor discipline or something being papered over. Businesses can survive losses; they rarely survive unexplained cash leakage.

3. Board composition

This is one of the most obvious at first glance, but many investors don’t appreciate how much the composition at any given point in time can tell you. If the board is dominated by founders, long-time friends, former executives, or people with overlapping histories, independence may exist on paper but not in practice. A board that rarely refreshes itself, or where the chair and CEO roles blur, reduces the chance of anyone saying “no” internally.

4. Executive incentives

If bonuses are tied to revenue, user growth, or “strategic milestones” rather than cash flow, return on capital, or balance sheet strength, management is being paid to inflate optics. This doesn’t mean fraud — but it increases the odds of aggressive accounting and risk-taking. Now, how can you tell incentives? Just look at your company’s annual report which will outline these.

5. High executive turnover

This is not just the CEO and directors but even management who are not on the board like COOs and CFOs – often their arrival is trumpeted just as much as the hiring of a CEO. But such executives leaving after short tenures, “interim” finance heads becoming the norm, or vague explanations like “pursuing other opportunities” often precede restatements or disputes behind the scenes. Good management don’t flee stable, well-governed companies. And they certainly don’t walk away before they even start.

6. Defensiveness toward scrutiny

No company ever welcomed bad media articles, bad Hot Copper posts or short seller reports. However, companies that attack short sellers instead of addressing questions, refuse to provide simple disclosures, or blame “market misunderstanding” repeatedly may be signalling deeper issues. Healthy businesses welcome transparency because it lowers their cost of capital.

7. Related-party transactions

Most of them are legal but that doesn’t mean they cannot be uncomfortable. There are plenty of examples but some of them include leasing assets from entities tied to executives, paying consulting fees to insiders, or acquiring businesses with personal connections. These are classic governance stress points, especially in small caps.

8. Auditor behaviour

This matters more than most people realise. Frequent auditor changes, delays in reporting, or qualified opinions buried deep in the notes are not normal. Even more subtle is when a reputable auditor stays on but the audit fees spike sharply without a clear explanation — that can mean higher perceived risk.

Of course, auditors staying on too long can be a red flag too, but keep in mind different auditors can come to different conclusions. The whole reason CTD has been suspended for 6 months is because a new auditor had a different view to the predecessor on revenue recognition, and a third had to be brought into determine which was right – and we still do not know.

9. Capital raising at odd times

Raising equity immediately after positive announcements, despite claiming strong cash runway, often means poor governance in the sense that management is most likely focused more on dilution minimisation for themselves than long-term shareholders — or that the cash position is tighter than advertised.

10. How bad news is delivered

Well-governed companies front-foot problems clearly and early. Poorly governed ones drip-feed disappointments, bundle bad news with good news, or quietly downgrade guidance after market close. The pattern of behaviour matters more than any single announcement.

Conclusion

We have one final piece of advice: trust your discomfort. If you find yourself constantly explaining away things that don’t quite add up — “it’s early days,” “they’re investing for growth,” “the market just doesn’t get it” — that rationalisation process is often the investor, not the company, doing the governance work.