Definitions are reprinted or adapted from several sources, including Practical Guide to Corporate Governance, Organization for Economic Cooperation and Development (OECD), and


Accountability: In corporate governance terms, it is the responsibility of a board of directors to shareholders and stakeholders for corporate performance and actions of the corporation. It is the concept of being responsible for all actions performed by the company’s management and reporting this information to stakeholders. It also refers to the accountability of management to the board for its actions in running the business.

Accounting Standards (also see Generally Accepted Accounting Principles, GAAP): A widely accepted set of rules, conventions, standards and procedures, as established by accounting standard setters, for recording and reporting financial transactions and information.

Acquisition: Gaining control of another corporation by share purchase or exchange. An acquisition can be hostile or friendly.

Agency Conflicts: Problems that can arise when a principal hires an agent to act on his behalf, giving the agent authority and decision-making power.

Agency Costs: Costs incurred by an organization for problems related to divergent management-shareholder objectives. The costs consist of two main sources: costs inherently associated with using an agent (e.g., the risk that agents will use organizational resources for their own benefit) and costs of techniques used to mitigate the problems associated with using an agent (e.g., the costs of producing financial statements or the use of share options to align executive interests to shareholder interests).

Agency Theory: A theoretical framework used to describe the relationship of power and interest between someone, the principal, who hires a second party, the agent, to act on his behalf.

Depositary Receipt (ADR): A security issued by a U.S. bank in place of the foreign shares held in trust by that bank, facilitating the trading of foreign shares in U.S. markets.

Annual General Meeting (AGM) (Shareholders’ Assembly): A shareholders’ gathering, usually held just after the end of each fiscal year, at which shareholders, directors, and management discuss the previous year, the financial statements and the outlook for the future. At the meeting, directors are elected and other shareholder concerns may be raised. The AGM is the main opportunity for shareholders to put questions directly to the directors of the company and to exercise their voting and decision-making power.

Annual Report: A document issued annually by companies to their shareholders. It contains information on financial results and overall performance during the previous fiscal year and comments on the future outlook. The Annual Report should include the Corporate Governance Report and other narrative reports, such as the CEO’s Report.

Auditor’s Opinion: A certification that accompanies financial statements, provided by independent auditors who audit a company’s financial statements and records. The opinion indicates whether or not, overall, the financial statements present a fair reflection of the company’s financial condition. Audit: Is a review of the historical financial statements to enhance the degree of confidence in them. Then, examination and verification of a company’s financial and accounting records and supporting documents by a competent, qualified professional and independent external auditor is to assure readers that they are in accordance with applicable reporting and accounting requirements, are free from material misstatement due to fraud or error and are true and fair representation of the company’s financial condition.

Audit Committee: A committee constituted by the board of directors, typically charged with oversight of company reporting and disclosure of both financial and non-financial information to stakeholders. The committee usually is responsible for selecting and recommending the company’s audit firm to be approved by the board/shareholders. Usually the Audit Committee is also responsible for the control environment of the company and risk oversight, if there is no separate risk committee of the board.


Board of Directors: The collective group of individuals elected by the shareholders of a company to direct and control the company. They define vision and mission, set the strategy and oversee the management of the company. The board is charged with selecting the chief executive officer (CEO), defining the compensation package of officers and setting the long-term objectives of the firm and oversight of risk and compliance

Board Statutes (or Board Charter): Document that details the roles, responsibilities, composition and functioning of the board of directors and its committees.

By-Laws: A written document stating the rules of internal governance for a company as adopted by its board of directors or shareholders. Includes topics such as election of directors, duties of officers, and how share transfers should be conducted.


Cash Flow Rights: The right to receive a specified portion of the company’s profits. Cash-flow rights for shareholders are determined by the company, based on the amount invested and the ownership of the specific class of shares.

Chairman/Chairperson of the Board: Highest-ranking director in a board of directors. The chairman is responsible for leadership of the board, the effectiveness of the board’s functioning, that it has proper access to all the information it requires to make an informed decision, the elaboration of the board agenda, and ensuring that the board’s business is conducted in the interest of all shareholders.

Company Charter: An official document filed with the relevant government agency in the country where the firm is incorporated. The charter outlines the corporation’s purpose, powers under law, authorized classes of securities to be issued and the rights and liabilities of shareholders and directors.

Chief Executive Officer (CEO): The highest-ranking management officer of the company who reports to the board of directors. The CEO is tasked with short-term decisions and leadership of employees, implementation of strategy, risk management and oversight of management.

Classified Board: Structure of board of directors in which every year, a fraction of the directors are elected, each for a multiyear term. Also called classified board.

Codes of Conduct/Ethics: Developed and adopted by organizations to define appropriate behaviors and actions on relevant and potentially delicate subjects. It is an indicator of how the company will achieve its goals and go about its business.

Committees of the Board: Comprises board members only; committees are established to assist the board in the analysis of specific subjects outside of regular board meetings. Common committees are the Audit, Remuneration and Nomination Committees.

Common Shares: Equity securities representing ownership in a corporation and providing the holders with voting rights and the right to a share in the company’s residual earnings through dividends and/ or capital appreciation.

Compliance: Agreeing to and abiding by rules and regulations. In general, compliance means conforming to a specification or policy (internal or external), standard or law that has been clearly defined.

Concentrated Ownership: A form of ownership in which a single shareholder (or a small group of shareholders) holds the majority of the company’s voting shares.

Conflict of Interest: Reflects both a legal and/or ethical situation where loyalties, interests and duties compete and conflict. It includes a situation that has the potential to undermine the impartiality of a person because of the possibility of a clash between the person's self-interest and professional interest or public interest. It may also be a situation in which a party's responsibility to a second party limits its ability to discharge its responsibility to a third party. Directors have a duty to avoid conflicts of interest and should always act in the best interests of the company and the shareholders as a whole.

Control Block: The combined group of shares that represent the majority of a company’s voting shares.

Controlled Companies: Firms in which an individual or a number of connected individuals or a legal entity holds the majority of the voting rights.

Controlling Shareholders: Shareholders who own enough of the company’s voting capital to control the composition of the board of directors — typically, this is 30 percent or more and is usually a controlling family or state shareholder.

Cost of Capital: The expected rate of return the market requires to attract funding for a particular investment.

Cost of Debt: The cost of funds borrowed at current market rates.

Cost of Equity: The minimum rate of return a firm must offer the owners — as compensation for a delay in the return on the investment and for taking on the risk.

Cumulative Voting: A voting system that gives minority shareholders more power, by allowing them to cast all of their board of director votes for a single candidate, as opposed to regular or statutory voting, in which shareholders must vote for a different candidate for each available seat, or distribute their votes between a number of candidates.

Current Ratio (current assets/current liabilities): A measure of the short-term liquidity of the firm — the ability to pay its short-term liabilities.


Daily Volume of Shares Traded: Volume of a given share traded on the financial exchange each day.

Debt Ratio (current + long term financial debt / total assets): A measure of the long-term financial leverage of the firm.

Dividend Yield: The ratio of annualized dividends to the price of a share. Dividend yields are used widely to measure the income return of a share.

Disclosure: Refers to the obligation of a firm to provide material, market-influencing information in accordance with the requirements of a number of parties, including regulatory authorities, the public or in accordance with standards, such as accounting standards, and self-regulatory contracts. Disclosure contributes to the transparency of the firm, which is one of the main corporate governance principles.

Dispersed Ownership: An ownership structure in which there is no controlling block of shareholders. The shares are held by many shareholders, each of whom owns only a small percentage of shares, and none of whom can make or influence decisions on corporate matters alone.

Dual-class shares: Shares that have different rights, such as A Class and B Class shares, where one class has voting rights and the other does not.


EBITDA Margin (EBITDA / operational revenues): A measure of profitability, indicating the margin of return for a company’s Earnings Before Interest, Tax, Depreciation, and Amortization.

Economic Profit (Residual Profit): The profit earned after deductions for the cost of all capital invested. Economic profit equals operating profit after income tax minus cost of capital invested.

Economic Value Added (EVA): A financial measure that estimates the true economic profit after adjustments/corrections to deduct the opportunity cost of equity capital. The measure represents the value created, above the required return, for the company’s shareholders.

Executive Session: The portion of a board of directors’ meeting that excludes the chief executive or any other executive.


Family Constitution: Guidelines for the rights and duties of family members who will share in the family’s resources, mainly those associated with invested companies.

Family Council: Organized forum for family members to meet and discuss the current and future state of the family business. Members may, or may not, be directly involved in the day-to-day business operations. The family council is a way of building family unity and cohesiveness through a shared vision of the family’s guiding principles and to separate the professional management of the firm from the personal family issues. It is usually the forum to determine how the family shareholding will be voted on any matter.

Family Office: A group of support services designed for families with very large and complex sets of assets. Often they will comprise financial, legal and investment banking support. The office is intended to protect family interests. The Family Office is intended as a vehicle for optimal management and comprehensive coordination of individual wealth components. The family office can be a tool to implement broader succession, leadership, and family governance plans.

Family-Owned Businesses: Companies and projects in which the controlling shareholders belong to the same family (immediate or wider family members) or group of families.

Fairness: Respect for the rights of all shareholders and stakeholders. One of the corporate governance principles ensuring the equal treatment of all shareholders and attention to the legitimate rights of stakeholders.

Financial Statements: a complete set of financial statements comprises a balance sheet, an income statement, a statement of changes in equity, a cash flow statement and notes. They collectively communicate an entity’s economic resources or obligations at a point in time or the changes therein for a period of time in accordance with a financial reporting framework.

Free-Float: The portion of shares negotiated in the market, giving liquidity to shares. These shares are not held by large owners and are not shares held in the company’s treasury.

FSA: Financial Services Authority in the United Kingdom, responsible for market regulation and oversight.


Generally Accepted Accounting Principles (GAAP): Accounting rules, conventions and standards for companies, established by reporting requirements and accounting standard setters in the country. Each country is likely to have a GAAP, which is unlikely to be identical to any other country’s GAAP. For example US GAAP is the body of accounting policies applicable to U.S.-registered firms and the GAAP rules are issued by the Financial Accounting Standards Board (FASB). These are not identical to IFRS standards issued by the International Accounting Standards Board and applied in Europe and many other countries.


Hostile Takeover: The continued pursuit of a company acquisition after the target company’s board rejects the offer; or a situation, in which the bidder makes an offer without prior notification of the target company’s board.


Independent Auditors: Professionals from an external audit firm charged with undertaking an audit of the financial statements. An audit may be required annually, half-yearly or quarterly. In most countries the independent auditors undertake an annual audit. They must have no personal interest in the financial statements and ought not to have had any role in the development of the financial statements. The independent auditor is required to render an unbiased judgment that the financial statements and accounting records of the firm are likely to be free from material misstatement and are a fair reflection of the financial position of the firm.

Independent Director: Someone whose only nontrivial professional, familial, personal or financial connection to the corporation, its chairman, CEO or any other executive officer is his or her directorship. The independent director is expected to be capable of applying objective judgment to all company decisions.

Insider trading: Trading in securities by someone connected with the company or with special knowledge about the company. Insider trading can be illegal or legal, depending on when the insider makes the trade. It is illegal when the material information is not available to the public and such information has the capacity to have an effect on the share price.

Institutional investors: Are professional investors who act on behalf of beneficiaries, such as individual savers or pension fund members. Institutional investors/shareholders may be the collective investment vehicles, which pool the savings of many or the asset managers to whom they allocate the funds. (Definition taken from ICGN – Corporate Risk Oversight Guidelines 2010).

Internal Audit: An independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization to accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes.

Investor Relations: The corporate communications department of a company. This department specializes in information and disclosure management for public and private companies as they communicate with the investment community at large.


Lead Director: A term used in the United States to refer to an independent director who should provide counterbalance to the power of any controlling shareholders’ representatives on the board and/or the CEO. The Lead Director tends to be the leader of several independent directors on the board and who ensures that the supervisory responsibilities of the board are being accomplished. The Lead Director’s core responsibilities include involvement in agenda setting, chairing executive sessions, providing feedback to the CEO after executive sessions and helping to shape boardroom dynamics.

Liquidity Index: Created by stock markets to provide a broad indication of the traded percentage of volume for a given stock over the total volume traded by all stocks in the period.


Market Capitalization: The market value of the firm, defined by the number of outstanding stock multiplied by the market price of the stock.

Minority Shareholders: Those shareholders with minority stakes in a company controlled by a majority shareholder — usually less than a 5 percent stake. However, each country may determine various thresholds applicable to the term “minority shareholder.”


Non-Voting Shares: Owners holding this share class do not commonly have voting rights at the AGM, except on some matters of high¬est importance. Usually, non-voting shareowners have preferential rights for receiving dividends.


One-tier board: A board of directors composed of both executive and non-executive members. It delegates day-to-day business to the management team. Found in U.S., the U.K., Commonwealth countries. (see Two-tier Board)

Ownership Structure: The way in which company shares are distributed among shareholders.


Payout Index (dividend per share / earnings per share): A measure of the dividends paid by the firm based on its net earnings.

Price/Earnings (PE) Ratio: A measure of relative valuation of a firm, determined by the current share price divided by the projected earnings per share.

Present Book Value (PBV): A measure of relative valuation of a firm, given by the current share price divided by the book value of shares.

Poison Pill: A device designed to prevent a hostile takeover by increasing the takeover cost, usually through the issuance of new preferred shares that carry severe redemption provisions or other mechanisms that invoke special bonus exit provisions for senior executives of the takeover target.

Preferred Shares: Equity securities representing ownership in a corporation with preferential rights over other share classes in regard to the payment of dividends and distribution of assets upon liquidation. Preferred shares usually do not carry voting rights.

Proxy: A proxy in CG terms is an person or agent, legally authorized to act on behalf of another party. Very often, shareowners not attending a company’s annual meeting, may choose to vote their shares on resolutions being put to the meeting by proxy. The proxy will cast votes on relevant issues on the shareowners’ behalf. Most companies, when they circulate notices for the annual meeting to shareowners, include a proxy notice. This is a notice providing information on the issues on which there will be a vote at the meeting. The proxy information should allow shareowners to make an informed decision on the issue.

Pulverized/Dispersed Ownership: An ownership structure in which there are no controlling shareholders.

Pyramidal Structure: An organizational structure common in family-dominated companies. Legally independent companies are controlled by the same family through a chain of ownership relations.


Related Party: A party is related to an entity if it can directly or indirectly control the other party or exercise control through other parties; it may also be where parties are subject to a common control from the same source. Related parties tend to have influence over the financial or operating policies of a firm or have the power to influence another party’s actions. A related party may be a close family member (including partners, spouses, children, other relatives), a key manager in the entity (and their close family members), or entities, such as subsidiaries of the entity, it holding company, joint ventures, and associates.

Return on Equity (ROE): Net income/book value of equity. A measure of profitability, indicating the percentage return on capital invested by shareholders.

Risk Management: The process of identifying, analyzing, managing and monitoring a corporation’s exposure to risk and determining optimal approaches to handling such exposure.


Sarbanes-Oxley Act: U.S. legislation that tightened up corporate financial reporting, introduced a federal accounting supervision board and criminal liability for executives who are shown to have falsified accounts.

Say on Pay: The ability of shareholders in a corporation to actively vote on how much senior executives employed by the company should be compensated. Corporate laws may provide this power to shareholders.

Securities and Exchange Commission (SEC): The U.S. agency empowered to regulate U.S. financial markets to protect investors. All companies listed in U.S. stock exchanges must comply with SEC rules and regulations.

Shareholders: Holders of shares issued by companies.

Shareholders’ Agreement: A written document governing the relations among shareholders and defining how the company will be managed and controlled. The agreement helps to align the objectives of controlling shareholders to safeguard common interests and to protect the interests of minority shareholders.

Shareholders Rights: The rights resulting from ownership of shares, which may be based in legal rights or other rights contracted with the company. The basic shareholder rights include the right to information on the company, to attend the meeting of shareholders, to elect directors, to appoint the external auditor, voting rights and cash flow rights.

Standard & Poor’s 500 Index (S&P500): An index of the 500 largest U.S. companies, accounting for 85 percent of the dollar value of all shares listed on the New York Stock Exchange (NYSE). The index provides a general measure of the overall performance of the U.S. stock market.

Solvency Ratio (EBIT/Interest Expense): A measure of a firm’s ability to pay its interest expenses in a given period.

Staggered Board: Structure of board of directors in which every year a fraction of the directors are elected, each for a multiyear term. Also called a classified board.

Stakeholder: A person or organization with a legitimate interest in a project or company. In a more general sense, it refers to suppliers, creditors, clients, employees, and the local community — all affected by the actions of the company.

Share Multiple (Share Ratios): Ratios designed to measure the claims of shareholders relative to earnings (cash flow per share) and equity (book value per share) of a firm.

Share Option: An agreement, or privilege, which conveys the right to buy or sell a specific security or property at a specified price, by a specific date. The most common share options are: calls — the right to buy a specified quantity of a security at a set strike price at a time on or before expiration — and puts — the right to sell a specified quantity of a security at a set strike price at a time on or before expiration.


Tag-Along Rights: If a majority shareholder sells his/her stake, minority holders have the right to participate and sell their stake under the same terms and conditions as the majority shareholder. This right protects minority shareholders and is a standard inclusion in shareholders’ agreements.

Takeover: The purchase of a public company (the target) by another company (the acquirer or bidder).

Tobins’ Q: A proxy for corporate market value commonly used in academic literature. It is calculated as the market value of a firm’s assets divided by the replacement value of the firm’s as-sets. The indicator is named for James Tobin, the Yale University Nobel-winning economist who created it.

Trading Policy: Terms and conditions that specify the conditions under which insiders — typically directors and officers of a company — can trade company shares. It also includes specific periods when insiders may not trade their shares, called “black out periods.”

Transparency: The corporate governance principle of publishing and disclosing information relevant to stakeholders’ interests and to shareholders on all price-sensitive material matters

Tunneling: An illegal business practice in which a majority share¬holder or a high-level company insider directs company assets or future business to themselves for personal gain.

Two-tier Board: A board of directors that divides supervisory and management duties into two separate bodies. The supervisory board, comprising non-executive directors, oversees the management board, comprising executive directors. Common in France, Germany, Eastern Europe. Not all styles of two-tier board are identical.


Value Based Management (VBM): Value Based Management (VBM) is the management approach that ensures corporations are managed consistently on value (normally maximizing share¬holder value). The three elements of VBM are: creating value — how the company can increase or generate maximize future value, similar to strategy; managing for value — governance, change management, organizational culture, communication and leadership; and measuring value — valuation.

Voting Rights: The right to vote at shareholders’ meetings on is¬sues of importance for the company.

Voting Shares: Shares that give the shareholder the right to vote on matters of corporate policy, including elections to the board of directors.


Weighted Average Cost of Capital (WACC): A measure of return on a potential investment. The measure includes cost of debt and equity, weighted by their relative contribution to overall costs in proportion to total funding and the cost of the related interest or dividend payments