The Basic Governance Structure: The Interests of Shareholders as a Class

Vocabulary flashcards covering key governance concepts from The Interests of Shareholders as a Class.

Agency costs

Costs arising from the conflict between managers and shareholders, including monitoring and incentive costs to align or control behavior.

Investor ownership

Ownership pattern where ultimate control lies with shareholders, often distant from daily operations, creating information and coordination costs.

Delegated management

Shifting decision-making to directors and managers to economize on information/coordination costs, which generates agency costs.

Shareholder–manager agency costs

Costs resulting from managers pursuing their own interests rather than shareholders’ interests.

One-tier board

A unitary board that both manages and supervises, often with committees; common in the US, UK, and Japan.

Two-tier board

A governance structure with a separate management board and supervisory board; common in Germany and Brazil; may coexist with codetermination.

Codetermination

German system where workers are represented on the supervisory board to reduce coordination costs between shareholders and employees; large firms often require a minimum number of worker representatives.

Appointment rights

Shareholders’ power to appoint (and remove) directors; may include nomination rights and minority protections in some jurisdictions.

Nomination function

Process by which candidates for election are identified; boards may search, while shareholders vote on nominees; practice varies by country.

Proxy access

Right to place nominees in a company’s proxy materials so all shareholders can vote on them without separate solicitations.

Insurgent candidates

Activist or dissident nominees seeking board seats through a proxy contest; typically voted on in a standard up-or-down vote.

Short slate

A tactic allowing activists to nominate a small slate of candidates to persuade investors to support some or all nominees.

Removal rights

Shareholders’ power to remove directors; often non-waivable in some jurisdictions, with variations on “cause” and process.

Staggered (classified) board

A board where only a fraction of directors are up for election each year, hindering rapid removals; common in Delaware.

Director term length

Length of directors’ terms varies by jurisdiction (e.g., US ~1 year; UK/Japan ~2 years; Germany/France ~5–6 years; Brazil/Italy ~3 years).

Decision rights

Shareholders’ authority to approve important corporate actions; scope varies across jurisdictions and includes dividends, mergers, and other significant transactions.

Say on pay

Advisory shareholder vote on executives’ compensation; expanded in the US by Dodd-Frank and increasingly debated elsewhere.

Class 1 transactions

UK premium listing rule requiring shareholder approval for transactions exceeding a significant threshold (e.g., 25%).

Independent directors

Non-executive directors not tied to management; central to trusteeship, often sitting on key committees; independence is encouraged by codes and law.

Trusteeship strategy

Use of independent directors as guardians of minority or non-shareholder interests; supports board oversight and fair governance.

Reward strategy

Equity-based compensation intended to align managers’ incentives with shareholders’ interests; can be high-powered and scrutinized (e.g., by taxes and regulation).

Corporate governance codes

Soft-law guidelines (comply-or-explain) guiding board composition and independence; not legally binding but influential.

Stewardship Code

UK and Japan framework encouraging asset managers to engage with portfolio companies and disclose voting policies; not mandatory.

Independent audit committees

Audit committees primarily composed of independent directors to oversee financial reporting and internal controls.

Duty of care

Fiduciary obligation to exercise reasonable care in board/officer actions; varies by jurisdiction, with some adopting business judgment rules.

Business Judgment Rule

Judicial deference to directors’ business decisions if made with appropriate information and process; reduces liability for ordinary business mistakes.

Exit rights

Rights to withdraw investment or sell shares; used as a governance mechanism, though more limited outside crisis or minority protection contexts.

Derivative actions

Private legal actions by individual shareholders on behalf of the corporation to address misconduct or breach of fiduciary duties.