Corporate Governance Vocab

Accounting Reform and Investor Protection Act of 2002

act that amended the securities laws to provide better protection to investors in public companies by improving the financial reporting of companies.

Agency problems

a conflict of interest inherent in any relationship where one party is expected to act in another's best interests.

Anglo-American model

one of shareholder primacy, that is, it considers shareholders to be of primary importance.

Audit committee

board responsible for assessing the adequacy of internal control systems and the integrity of financial statements that are prepared by management.

Backdating

an instance when the recipient is given the option of buying stock at yesterday’s price, resulting in an immediate and guaranteed wealth increase.

Board of directors

committee that oversees management on behalf of the shareholders and with full regard for the stakeholders.

Bullet-dodging

delaying of a stock option grant until right after bad news.

Business judgement rule

principle that holds that courts should not challenge board members who act in good faith, making informed decisions that reflect the company’s best interests instead of their own self-interest.

Business Roundtable (BRT)

a group representing more than 181 CEOs of large publicly traded companies, that affirmed that their businesses are committed to meeting the needs and providing long-term value to all of their stakeholders, not just shareholders.

CEO duality

occurrence when the CEO serves a dual function, being both CEO and chair of the board.

CEO pay ratio

a new rule that would require most public companies to regularly reveal the ratio of chief executive’s pay to that of employees.

Charter

document issued by the state, giving the corporation the right to exist and stipulating the basic terms of its existence, including corporate governance practices.

Classified boards (also known as staggered boards)

boards that elect their members in staggered terms.

Clawback provisions

compensation recovery mechanisms that enable a company to recoup compensation funds, typically in the event of a financial restatement or executive’s misbehavior.

Clean capitalism

an economic system in which prices fully incorporate social, economic, and ecological costs and benefits, and actors are clearly aware of the consequences of their marketplace actions.

Compensation committee

committee that has the responsibility of evaluating executive performance and recommending terms and conditions of employment.

Conflict of interest

a situation in which the concerns or aims of two different parties are incompatible.

Continental-European (or “Rhineland”) model

model where inside directors and civil law dominate, as well as block ownership and bank-orientation and stakeholder- coordinated governance.

Corporate gadflies

activist shareholders.

Corporate governance

the system by which companies are directed and controlled.

Corporate responsibility committee

committee that typically deal with such issues as diversity, equal employment opportunity, environmental affairs, employee health and safety, consumer affairs, political action, and other areas in which public or ethical issues are present.

Council of Institutional Investors (CII)

a nonprofit association of corporate, public, and union employee benefit funds.

Directors & Officers (D&O)

insurance that protects directors and officers against lawsuits alleging breach of fiduciary duty.

Dodd–Frank Wall Street Reform and Consumer Protection Act

passed in the wake of the global financial crisis and signed into law on July 21, 2010, this comprehensive legislation covers 16 major areas of reform affecting banks, credit card companies, credit rating agencies, insurance companies, hedge funds, and futures trading.

Director-primacy model

a newer perspective challenges the traditional model of shareholder primacy and suggests the balance of power in corporate governance should favor board members (versus shareholders), because board members are elected by shareholders and therefore represent their interests.

Employees

persons employed for wages or salary, especially at the non-executive level.

Fiduciary duties

a legal obligation of the highest degree for one party to act in the best interest of another.

Fragile mandate

the fact that a business’s legitimacy is constantly subject to ratification, and it must realize that it has no inherent right to exist.

Full disclosure (also known as transparency)

timely, meaningful, and reliable disclosures about a company's financial performance.

Glass Lewis

American proxy advisory services company golden parachute.

Information asymmetry

one party having information that another does not.

Inside directors

directors with ties of some sort to the firm.

Insider trading

the practice of buying or selling a security by someone who has access to material information that is not available to the public.

Institutional Shareholder Services (ISS)

a proxy advisory firm.

Legitimacy

the quality of being reasonable and acceptable.

• a condition that prevails when there is a congruence between an organization's activities and society's expectations.

Legitimation

the act of making lawful.

• a dynamic process by which a business seeks to perpetuate its acceptance.

Majority vote

the requirement that board members be elected by a majority of votes cast.

Management

the process of dealing with or controlling things or people.

Material information

information for which there is a substantial likelihood that a reasonable investor would consider it important in making investment decisions.

Nominating committee

a select group of directors on a corporate board charged with identifying nominees for election to the board.

Outside directors

directors independent from the firm and its top managers.

Personal liability

occurs in the event an accident, in or out of your home, that results in bodily injury or property damage that you are held legally responsible for.

Poison pill

intended to discourage or prevent a hostile takeover.

Ponzi scheme

lures investors in with the fake promise of profit but actually pays earlier investors with later investors’ money until the scheme collapses.

Private Securities Litigation Reform Act of 1995

a measure intended to rein in excessive levels of private securities litigation.

Proxy access

the ability of a long-term shareowner to place a limited number of alternative board candidates on the company's proxy card for the company's annual shareowner meeting.

Proxy advisory firms

firm that provides services to shareholders to vote their shares at shareholder meetings of companies.

Regulation FD (fair disclosure)

a rule that ensures that when companies disclose meaningful information to a limited group of individuals like large shareholders and securities professionals, they must do so publicly so that small investors can enjoy a more level playing field.

Restricted stock

shares in a company issued to employees as part of their pay, but which cannot be fully transferred to them until certain conditions have been met.

Risk committees

an independent committee of the board of directors that has responsibility for the oversight of the risk management policies and practices of the corporation's global operations.

Sarbanes–Oxley Act of 2002 (aka SOX or Sarbox)

act that amended the securities laws to provide better protection to investors in public companies by improving the financial reporting of companies.

Say on Pay movement

a trend that evolved from concerns over excessive executive compensation and failures to link CEO pay to performance.

Separation of ownership from control

the phenomenon associated. with publicly held business corporations in which the shareholders possess little or no direct control over management decisions.

Shareholder

an owner of shares in a company.

Shareholder activism

a person who attempts to use their rights as a shareholder of a publicly traded corporation to bring about change within or for the corporation.

Shareholder democracy

a concept advocated by corporate shareholders to increase their access to and influence over corporate governance.

Shareholder-Director Exchange (SDX)

a working group to develop protocols for director-shareholder engagement for U.S. public companies.

Shareholder engagement

the process by which investors in public companies leverage their position as shareholders to influence corporate decision making.

Shareholder lawsuit

another form of activism that allow shareholders to pursue claims against the corporation in which they hold shares.

Shareholder-primacy model

a theory in corporate governance holding that shareholder interests should be assigned first priority relative to all other corporate stakeholders.

Shareholder resolutions

a proposal submitted by shareholders for a vote at the company's annual meeting.

Social activism

intentional action by an individual to bring about social or political change.

Spring-loading

an option-granting practice in which options are granted to employees at a time that precedes a positive news event.

Staggered boards

a board that consists of directors grouped into classes who serve terms of different lengths.

Stakeholder governance model

corporate governance theory that focuses on the effect of corporate activity on all stakeholders of the corporation.

Stock option

a benefit in the form of an option given by a company to an employee to buy stock in the company at a discount or at a stated fixed price.

Team production model

the idea that the board of directors of a company operates as a mediating hierarchy tasked with balancing the interests of a corporation’s various constituencies.

Tippee

a person who receives a tip, as of money or information.

Tipper

a person who receives a tip, as of money or information.

Transparency

being honest and open when communicating with stakeholders about matters related to the business.