The judging panel - Prof Gillian Lewis, of Auckland University, Dr Clive Howard-Williams, of Niwa, and Dr Roger Young, of the Cawthron Institute - determined the award based on the results of the regional council's long-term water monitoring of the Shag.
The results showed significant improvement in E.coli levels in the river in the past 10 years, with levels recovering 13 percent a year since 2004 when the council's water plan was instituted.
Together with minimum flows and good farming practices, including fencing and reticulating stock water, it made the river stand out, the judging panel said.
"Small changes accumulated into a pretty significant change."
Regional council resource science manager Matt Hickey said he put having two Otago rivers in the final down to having tight communities who valued their rivers.
"It's their award, not ours."
Long-term monitoring was needed to show how land use changes impacted on water quality.
"It takes five to 10 years. We're not talking instant gratification."
There were "grumbles" 10 years ago when the water plan and minimum flows were introduced, but now the community was seeing the results of its work.
"You can see it works. We do have bottom lines, but they do have positive outcomes."
Mr Woodhead said E.coli concentrations in the Shag and the Waikouaiti had reduced markedly in recent years because of the sound management practices employed by farmers in both catchments.
"It was a huge pleasure to accept the award, particularly on behalf of farmers and others in the catchment, who have worked hard to implement rules in the Otago water plan," Mr Woodhead said.
"We are immensely gratified that these important awards have recognised an Otago river."
Otago Fish and Game chief executive Niall Watson said land use within the Shag River catchment was of low to medium intensity, which meant measures such as fencing the waterway benefited water quality.
"As well as good management practices evident there, its water quality was also a function of moderate farming intensity."