First and foremost you need to convince yourself that these governance issues are genuine. Don’t go by too much of rumours spreading on the internet, Twitter or on WhatsApp. Many of these rumours happen to be baseless. But when you find reports of such governance issues coming from multiple sources, it is better to cross check and be doubly sure. We have seen governance issues in companies in the recent past in companies like Vakrangee, PC Jewellers, Manpasand Beverages, ICICI Bank, Axis Bank etc. Governance issues arise when the management behaves in such a way as to compromise the interests of the shareholders and stakeholders at large.
We suggest that investors should exit companies the moment there are obvious governance issues. Companies like Satyam, Kingfisher, Deccan Chronicle and Financial Technologies had serious and obvious governance issues long before the stocks went into a tailspin. This should be an early warning signal. When you see governance issues in the company you are invested in, just think with your feet. Remember, institutional investors are extremely touchy about governance issues and this can have a deep impact on the stock price.