What a High Governance Score Leaves Out

The two boards behind the same score

Suppose a family office owns interests in a power supplier and a consumer goods manufacturer. Each board reports that it follows nearly all of its chosen governance recommendations. The investment chair has one afternoon for oversight visits. A percentage hardly tells her where to spend it. The supplier may face a large capital commitment that determines liquidity for a decade; the manufacturer may be about to renew a purchasing agreement with a company controlled by a director. Asking each board for the same extra policy document could leave both decisions unexamined. These companies and decisions are illustrative.

Corral-Lage and colleagues compiled an index from 64 recommendations for 101 Spanish listed companies in 2018 and 2019. A total of 12,928 item observations does not mean 12,928 independent firms: multiple items describe the same company in the same year. Near the upper end of a reporting scale, several companies can look similar even though the few recommendations they do not follow concern very different decisions. That is the useful question for an owner: what sits inside the unexamined remainder? The article studies reported governance and its correlates, not whether changing a board seat at a family-owned company increases returns.

Choose the decision before selecting the peer group

Ask the portfolio oversight lead to select one forthcoming decision in each company that could change the family’s loss exposure. For the power supplier, write down who may revise a project budget, the point at which a cost overrun must go back to the board and the person who can independently verify the revised estimate. For the manufacturer, identify who sets tender specifications, what would disqualify a bidder and who records interests in a related supplier. Preserve these decision descriptions before anyone sees a peer score. Otherwise it is easy to select the comparison that flatters a preferred board.

Choose peers by the decision they must govern as well as their industry. Two manufacturers may have very different control needs if one sells ordinary inventory and the other relies on a single negotiated public contract. A large listed firm can support a separate monitoring function that a smaller private company cannot staff. Document those differences. The aim is to decide which safeguard performs the same function in the smaller company, not to award it an automatic exemption because it is small.

Audit the explanation for an exception

For each relevant recommendation, keep the actual text, the company’s response, the reporting period and the record that would let a reviewer confirm it. Distinguish three states: followed with evidence, departed from with a testable alternative, and unknown. Unknown is not a pass. An owner who deliberately uses an external project engineer instead of a standing capital committee may still have an effective challenge process. Ask for the engineer’s last adverse finding and the board’s response. An engagement letter alone shows that advice was purchased; it cannot show that advice changed the decision.

For the manufacturer, a director representing the family may bring valuable product knowledge while also holding an interest in the bidder. Keep those two facts separate. Record whether the interest was disclosed before specifications were written, whether the director received competing bids, and whether someone else had real authority to refuse the contract. A minute stating that the director abstained from the final vote is useful but incomplete if the director had already selected the only eligible bidder. This is a proposed transaction test, not an inference that owner representation is improper.

Read the sector result without turning it into a hiring rule

The paper examines remuneration, monitoring and board structure and reports differences across sectors, including associations involving proprietary directors. A director category is not a measure of an individual’s independence of judgment. The same person may challenge capital spending vigorously but face a conflict on a supplier renewal. The sample covers two pre-pandemic years under a particular Spanish reporting framework. It does not identify which configuration will protect beneficiaries in another jurisdiction. Do not convert the fitted association into a quota, a compensation formula or a decision to remove a named director.

Close with evidence the next chair can use

The committee secretary should keep a short exception ledger indexed by decision rather than by questionnaire row. Include the accountable executive, the proposed safeguard, the evidence received and the date by which someone independent must decide whether it worked. Report the count of material exceptions still unsupported, their age and the amount exposed where it can be estimated. Keep the original denominator visible: a lower exception count after dropping difficult items is not an improvement.

At the next meeting, revisit the two decisions with their original records. Did the budget breach trigger review before money was committed? Could an unconflicted buyer actually reject the related supplier? Pause discretionary approval if authority is unclear or the only verification comes from the beneficiary of the transaction. Once the missing evidence is supplied, record the reason for resuming, revising or declining the proposal. This AI-assisted editorial procedure makes an explanation auditable. It has not been validated as an index of board quality or as a predictor of investment performance.

Source, attribution and limits

[1] Javier Corral-Lage; Asier Garayeta; Eduardo Trigo; J. Iñaki De la Peña. Does corporate governance differ by sector? An analysis under good practice criteria. The case of Spain. PLOS ONE (2024-10-11). https://doi.org/10.1371/journal.pone.0307806. CC BY 4.0.

101 Spanish listed companies in 2018–2019, with 64 recommendation items per firm-year. High reported compliance and repeated item observations do not measure board effectiveness independently. Sector associations do not identify causal effects, director competence or private-family-office returns.

Prepared by the Family Office Private Wealth Journal editorial research desk with AI assistance at the direction of Dr. Freedom Cheteni. Original research authors retain full credit and are not authors or endorsers of this companion. This proposed process has not been evaluated in a new empirical study; no independent peer-review acceptance is claimed. This is educational analysis, not individualized investment, legal or tax advice.

Implementation record

Open the cited sources

1. [1] Javier Corral-Lage; Asier Garayeta; Eduardo Trigo; J. Iñaki De la Peña. Does corporate governance differ by sector? An analysis under good practice criteria. The case of Spain. PLOS ONE (2024-10-11). ↗