Glossary A - D

Glossary A-D

  • Advisory board. A group of external advisors comprised of outside experts who help organizations manage change, reposition or reinvent themselves, make informed decisions on technology, innovation, design, and seek new strategic positions and alliances to expand globally. Perhaps more importantly, Advisory Boards help implement the great ideas that will differentiate a company from the competition. Unlike traditional corporate boards involved in governance, Advisory Boards give non-binding advice, possess no fiduciary or legal responsibilities, and are more flexible in size and composition. Members’ skills and expertise are more important than their rank, and Advisors are often more open and forthright than traditional “collegial” boards.
  • Agency theory. Explains the relationship between principals and agents in business. Agency theory is concerned with resolving problems that can exist in agency relationships; that is, between principals (such as shareholders) and agents of the principals (for example, company executives).
  • Annual report. A report issued by companies to their shareholders each year. Normally it contains information on overall performance, prospects, and audited financial information.
  • Audit. An independent review and examination of system records and activities that test for the adequacy of system controls, ensure compliance with established policy and operational procedures, and recommend any indicated changes in controls, policy, and procedures.
  • Audit committee. A committee formed from members of the company’s board of director. Normally the committee oversees the company’s financial reporting and sometimes risk management and legal compliance. The committee may also have the power to review and block related party transactions.
  • Board of directors. Group of individuals elected by shareholders to establish corporate management policies, select top management and make decisions on basic issues (e.g., dividend policies, mergers and acquisitions, sale of the enterprise or major assets).
  • Buy-sell Agreement. A legal contract, common in closely held businesses. It is an agreement that provides for the future sale of an owner business interest. A buy-sell agreement is also referred to as a business continuation agreement, a stock purchase agreement, or a buyout agreement. The buy-sell agreement arguably is the most important legal agreement for closely-held entities.
  • Capital increase. An issue of new shares by a company.
  • Chairman or chairperson. The person who chairs the board of directors.
  • Charter. A board charter outlines the principal role of the Board of Directors (Board), the demarcation of the roles, functions, responsibilities and powers of the Board, various Board Committees and matters reserved for final decision-making or pre-approval by the Board; and the policies and practices of the Board in respect of matters such as conflicts of interest and convening of Board meetings.
  • Code of ethics. Guidelines developed and adopted by organizations to define the appropriate course of action and behavior in relevant and potentially delicate situations. The purpose of the code of ethics is to promote an ethical culture in the company.
  • Compliance. Abiding by rules, procedures, and regulations, In general, compliance means conforming to a specification, policy (internal or external), standard, or law that has been clearly defined. It is also a set of practices that deals with adhering to the code of ethics.
  • Concentrated ownership. A form of ownership in which a single shareholder (or a small group of shareholders, united by agreement) holds the majority of the company’s voting shares.
  • Conflict of interest. A situation in which a person or group has a stake in a matter of business that may be different from the interest of the organization and can influence or make decisions motivated by that bias. When someone is in a position of trust which requires them to exercise judgment on behalf of others and also has interests of the sort that might interfere with the exercise of their judgment, and which the person is ethically required to either eschew or openly attest.
  • Consultants. Includes family business consultants and family wealth consultants who tend to have a process focus and help integrate the plans, governance, and interactions of the family, ownership and management groups as well as the individuals within each group; typically they no longer practice in their profession of origin.
  • Control environment. The attitude and actions of the board and management regarding the significance of control within the organization. The control environment provides the discipline and structure for the achievement of the primary objectives of the system of internal control. The control environment includes the following elements:
    • Integrity and ethical values.
    • Management’s philosophy and operating style.
    • Organizational structure.
    • Assignment of authority and responsibility.
    • Human resource policies and practices.
    • Competence of personnel.
  • Control process. The policies, procedures, and activities that are part of a control framework, designed to ensure that risks are contained within the risk tolerances established by the risk management process.
  • Controlling shareholder. A shareholder who has enough votes to choose a majority of the board and exert de facto control over management. A shareholder may be able to control the company while owning less that 50% of the equity through the use of shares with special voting rights.
  • Corporate governance. Refers to the structures and processes for the direction and control, and the relationships among the management, board of directors, controlling shareholders, minority shareholders, and other stakeholders.
  • Corporate Social Responsibility (CSR). Corporate actions which go beyond the actual business operations of a company. It encompasses activities and commitments related to the environment, labor safety and education, culture, social projects, charitable contributions.
  • Cousin consortium. Term used in the development model to refer to the stage where ownership is held by family members from different branches of the family (i.e. cousins); often this is when a family enterprise has transitioned from the 2nd generation to the 3rd generation.
  • Covenant. A protective clause in an agreement.
  • Cumulative voting method. Voting system intended to allow minority shareholders to elect some directors to the company’s board. Under cumulative voting, 10%-15% of vote is normally enough to select one board member. Under cumulative voting, which is designed to give some control votes to minority shareholders, each shareholder gets a block of votes equal to the numbers of shares he or she owns multiplied by the number of directors to be elected (see definition of straight voting).
  • Development financial institution. Development finance institution (DFI) is generic term used to refer to a range of alternative financial institutions that provide credit in the form of higher risk loans, equity positions and risk guarantee instruments to private and public sector investments in developing countries. The purpose of DFIs is to ensure investment in areas where otherwise, the market fails to invest sufficiently. DFIs aim to be catalysts, helping companies implement investment plans and seek to engage in countries where there is restricted access to domestic and foreign capital markets and provide risk mitigation that enables investors to proceed with plans they might otherwise abandon.
  • Duty of care. The duty of a board member to act on an informed and prudent basis in decisions with respect to the company.
  • Duty of loyalty. The duty of a board member to act in the interest of the company and shareholders.