Corporate Governance Explained

A conflict that arises when managers or agents may act differently from the interests of owners or principals.

Example: Managers may pursue an expensive acquisitionThe purchase of control or ownership of a company or business. that increases prestige but destroys shareholderA person or entity that owns one or more shares in a company. value.

Agency Problem is a conflict that arises when managers or agents may act differently from the interests of owners or principals; the governance mechanism helps control the agency problem created when the people managing a company do not bear all the consequences of their decisions.

Managers may pursue an expensive acquisition that increases prestige but destroys shareholder value.

A practical review of Agency Problem asks whether oversight changed management behaviour when interests diverged or performance deteriorated.

A yearly shareholder meeting at which financial reports, directors, auditors, and other matters are considered.

Example: Shareholders vote on director appointments at the AGM.

Annual General Meeting is a yearly shareholder meeting at which financial reports, directors, auditors, and other matters are considered; the governance mechanism concerns how authority, oversight, accountability and economic rights are divided among shareholders, directors and management.

Shareholders vote on director appointments at the AGM.

Before relying on it, determine who appoints or can remove the responsible party and whether minority shareholders receive timely information and fair treatment; independence on paper may be weakened by business or personal relationships.

A board committee that oversees financial reporting, internal controls, external audit, and related risks.

Example: The audit committee reviews significant accounting judgements before results are published.

Audit Committee is a board committee that oversees financial reporting, internal controls, external audit, and related risks; formal structure matters less than whether the responsible party has the authority, competence and willingness to act.

The audit committee reviews significant accounting judgements before results are published.

A practical review of Audit Committee asks whether oversight changed management behaviour when interests diverged or performance deteriorated; concentrated ownership can improve monitoring while harming minority investors.

The body elected or appointed to oversee a company and its management.

Example: The board approves strategy, major investments, and senior executive appointments.

Board of Directors is the body elected or appointed to oversee a company and its management; the governance mechanism helps control the agency problem created when the people managing a company do not bear all the consequences of their decisions.

The board approves strategy, major investments, and senior executive appointments.

Assess Board of Directors through company filings and actual decisions, not biographies or policy statements alone; compare executive incentives with long-term shareholder value. Concentrated ownership can improve monitoring while harming minority investors.

A shareholder able to direct or strongly influence a company through voting power or other rights.

Example: A founder owning 65% of voting shares is the controlling shareholder.

Controlling Shareholder is a shareholder able to direct or strongly influence a company through voting power or other rights; the governance mechanism concerns how authority, oversight, accountability and economic rights are divided among shareholders, directors and management.

A founder owning 65% of voting shares is the controlling shareholder.

Before relying on it, determine who appoints or can remove the responsible party and whether minority shareholders receive timely information and fair treatment.

The system of rules, oversight, incentives, and accountability through which a company is directed and controlled.

Example: Strong governance reduces the risk that managers act against shareholders' interests.

Corporate Governance is the system of rules, oversight, incentives, and accountability through which a company is directed and controlled; the governance mechanism helps control the agency problem created when the people managing a company do not bear all the consequences of their decisions.

Strong governance reduces the risk that managers act against shareholders' interests.

Before relying on it, determine who appoints or can remove the responsible party and whether minority shareholders receive timely information and fair treatment.

A board member who also holds a management role in the company.

Example: The chief executive serves as an executive director.

Executive Director is a board member who also holds a management role in the company; the governance mechanism helps control the agency problem created when the people managing a company do not bear all the consequences of their decisions.

For example, the chief executive serves as an executive director.

For Executive Director, inspect composition, independence, expertise, voting rights, meeting record, conflicts, related-party dealings and accountability for poor outcomes; concentrated ownership can improve monitoring while harming minority investors. Also compare Non-Executive Director, defined here as a board member who does not take part in day-to-day management.

A shareholder meeting called outside the normal annual meeting to consider urgent or special matters.

Example: The board calls an EGM to approve a major acquisition.

Extraordinary General Meeting is a shareholder meeting called outside the normal annual meeting to consider urgent or special matters; the governance mechanism concerns how authority, oversight, accountability and economic rights are divided among shareholders, directors and management.

The board calls an EGM to approve a major acquisition.

A practical review of Extraordinary General Meeting asks whether oversight changed management behaviour when interests diverged or performance deteriorated.

A director without material relationships that could compromise objective judgement.

Example: Independent directors review transactions involving controlling shareholders.

Independent Director is a director without material relationships that could compromise objective judgement; the governance mechanism concerns how authority, oversight, accountability and economic rights are divided among shareholders, directors and management.

Independent directors review transactions involving controlling shareholders.

Before relying on it, determine who appoints or can remove the responsible party and whether minority shareholders receive timely information and fair treatment. Also compare Board of Directors, defined here as the body elected or appointed to oversee a company and its management.

A shareholder that does not control the company.

Example: Minority shareholders rely on voting rights, disclosureThe provision of material information needed for informed decisions., and legal protections.

Minority Shareholder is a shareholder that does not control the company; the governance mechanism concerns how authority, oversight, accountability and economic rights are divided among shareholders, directors and management.

Minority shareholders rely on voting rights, disclosure, and legal protections.

A practical review of Minority Shareholder asks whether oversight changed management behaviour when interests diverged or performance deteriorated; the governance mechanism can satisfy formal rules without providing effective oversight. Also compare Controlling Shareholder, defined here as a shareholder able to direct or strongly influence a company through voting power or other rights.

A board committee that evaluates board composition, succession, and director candidates.

Example: The committee searches for a director with cybersecurity expertise.

Nomination Committee is a board committee that evaluates board composition, succession, and director candidates; the governance mechanism concerns how authority, oversight, accountability and economic rights are divided among shareholders, directors and management.

The committee searches for a director with cybersecurity expertise.

Assess Nomination Committee through company filings and actual decisions, not biographies or policy statements alone; compare executive incentives with long-term shareholder value. Good governance reduces avoidable risk but cannot guaranteeA contractual promise by another party to meet an obligation if the primary debtor does not. business success; Also compare Corporate Governance, defined here as the system of rules, oversight, incentives, and accountability through which a company is directed and controlled.

A board member who does not take part in day-to-day management.

Example: A non-executive director challenges management assumptions and monitors performance.

Non-Executive Director is a board member who does not take part in day-to-day management; the governance mechanism concerns how authority, oversight, accountability and economic rights are divided among shareholders, directors and management.

A non-executive director challenges management assumptions and monitors performance.

Before relying on it, determine who appoints or can remove the responsible party and whether minority shareholders receive timely information and fair treatment; concentrated ownership can improve monitoring while harming minority investors.

A vote cast by another person or electronically on behalf of a shareholder.

Example: An investorA person or organisation that commits capital with the expectation of a financial return. submits a proxy vote without attending the annual meeting.

Proxy Vote is a vote cast by another person or electronically on behalf of a shareholder; formal structure matters less than whether the responsible party has the authority, competence and willingness to act.

An investor submits a proxy vote without attending the annual meeting.

A practical review of Proxy Vote asks whether oversight changed management behaviour when interests diverged or performance deteriorated; independence on paper may be weakened by business or personal relationships.

A transaction between an entity and a person or organisation connected to it.

Example: The board reviews a propertyLand and buildings held for use, rent, development, or capital appreciation. purchase from a company owned by the chief executive's family.

Related-Party Transaction is a transaction between an entity and a person or organisation connected to it; the governance mechanism helps control the agency problem created when the people managing a company do not bear all the consequences of their decisions.

The board reviews a property purchase from a company owned by the chief executive's family.

Assess Related-Party Transaction through company filings and actual decisions, not biographies or policy statements alone; compare executive incentives with long-term shareholder value. Good governance reduces avoidable risk but cannot guarantee business success.

A board committee that oversees pay policies for directors and senior executives.

Example: The committee links executive bonuses to long-term performance targets.

Remuneration Committee is a board committee that oversees pay policies for directors and senior executives; formal structure matters less than whether the responsible party has the authority, competence and willingness to act.

The committee links executive bonuses to long-term performance targets.

Before relying on it, determine who appoints or can remove the responsible party and whether minority shareholders receive timely information and fair treatment; independence on paper may be weakened by business or personal relationships.

The responsible oversight of invested assets, including monitoring companies and exercising ownership rights.

Example: A pension fundA pool of retirement assets invested on behalf of members or beneficiaries. engages a company about board independence and climate risk.

Stewardship is the responsible oversight of invested assets, including monitoring companies and exercising ownership rights; the governance mechanism helps control the agency problem created when the people managing a company do not bear all the consequences of their decisions.

A pension fund engages a company about board independence and climate risk.

Before relying on it, determine who appoints or can remove the responsible party and whether minority shareholders receive timely information and fair treatment; good governance reduces avoidable risk but cannot guarantee business success.