How good governance drives performance

In the investment world, the spotlight these days is on big macro stories - political instability, tariffs and of course interest rates, and inflation. These are the things that dominate headlines and shape short-term economic and investor sentiment. But for long-term investors there’s a quieter, more consistent force that drives strong performance: good governance.

At Honeytree, we see good governance as the key driver of long-term returns. Environmental and social and financial factors are important but we view them as indicators that a company is well governed. It’s a strong governance system that determines whether a company can turn long-term strategy into results. Governance is about how a business actually runs, how decisions are made, and whether those decisions create lasting value.

What Good Governance Really Means

Governance isn’t a fuzzy concept about doing good. It’s about clarity, accountability, and discipline. It shapes how a company allocates capital, manages risk, attracts and retains talent, engages its stakeholders, and plans for the future. These issues are the foundation of operational and financial performance.

Well governed Boards, for example, build a team of directors who can manage governance systems, ask tough questions, make tough decisions, and govern on behalf of all stakeholders. A well governed Board can ensure their nominating committee covers all areas of expertise required to govern effectively. Directors with deep sector expertise or history with the company can bring insights and context that an outsider can’t, while directors from outside bring a fresh perspective, and skills such as governance and financial expertise. The key is balance: a Board that's both objective enough and knowledgeable enough to give real guidance and maintain the company's governance systems.

How Good Governance Pays Off

When governance systems work you see more consistent growth, more efficient capital allocation, and a management team that is able to focus on the long-term. You see fewer scandals or surprise blowups, because good governance systems help engaged Board members catch risks early. You see stable leadership teams and aligned incentives, where compensation reflects long-term value creation, not quarterly performance.

The company cultures of well governed companies also tend to foster innovation better. Companies with strong governance are often the ones willing to have constructive conversations with stakeholders or back bold ideas that won’t pay off in just one quarter.  Good governance is truly focused on the long term positive impact on all stakeholders.

The Honeytree Lens

At Honeytree, we look at governance as a fundamental factor in our investment analysis – not as a separate ‘ESG’ factor.  We want to see a company’s unwavering focus on long term sustainable growth for the benefit of all stakeholders in policy and practice.

We look for patterns that indicate a well governed company focused on the long-term: consistent and high earnings and dividend growth, strong employee retention, and stable and credible management teams.  We look at how companies manage the scandals they encounter, and more importantly what they learn from them. We look at a company’s ability to make strategic goals that directly benefit their bottom line, and their actual ability to achieve that. We look to avoid companies with many signs of weak governance that can precede poor outcomes like severe controversies, capital misallocation, loss of stakeholder trust, even corporate collapse.   

Highly effective boards add alpha through the quality of their governance - helping them avoid risks and prioritize the long-term.  

A team or rowers works together during a race.