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The ABCs of Corporate Governance - Key technical terms EVERY leader must know

If you currently serve as, or are new to the role of Board Director, Shareholder, Company Secretary, Chief Executive Officer, Auditor, Manager or any other governance player, chances are you will come across certain common technical terms that are used in corporate governance across the globe. In this article, we will highlight some of those terms to assist you in understanding the world around you and perform at a higher level in your field.

 

A – is for AUDIT. An audit is an INDEPENDENT REVIEW of financial statements, internal control systems, risk management systems, or any operational process that the Board may direct. Organizations may have internal auditors, external auditors and/or risk officers depending on its size and complexity. Company shareholders depend on audit reports to satisfy itself that the financial statements are free from material misstatement or error and as such reflect an accurate and true position of the company’s financial health. Any threat to an auditor’s independence should be minimized.

 

B – is for BALANCE OF POWER. A balance of power is a state or situation in which one group or individual does not dominate decision making. Governing bodies ought to make every effort to ensure that a balance of power exists at the level of the Board and Executive Management so as to avoid “groupthink” and to benefit from varying views and perspectives.





 

C – is for COMPLY OR EXPLAIN. This is a term that is typically used in codes of best practice around the globe. It allows governing bodies the flexibility to comply with the voluntary recommendations contained in the code or to explain any areas of non-compliance. It recognizes that the diversity of circumstances and complexity of various types of organizations may restrict a company’s ability to comply with every recommendation as it may not be in its best interest to do so.

 

D – is for DERIVATIVE ACTION. This is legal action that can be taken against a director by company shareholders, on behalf of the company, alleging negligence or breach of trust or duty. It is important that directors are aware of the possibility of this type of action so that appropriate mitigating measures can be taken.


E – is for ESG. ESG stands for Environmental, Social and Governance. ESG considerations ensure that companies are not solely focused on generating financial gains, but also take into account environmental, social and good governance practices geared toward ensuring the long-term success of the company. Recent global trends have shown that companies, particularly listed companies that trade on the stock exchange, are being called to account for and report on, their responsibility to preserve the environment, to consider the social impact of their behaviour and to ensure such matters are prioritized by the governing body.

 

F – is for FIDUCIARY DUTY. This is a legal obligation of one party to act in the best interest of another. As directors, company secretaries, CEOs and any governance player, we have a duty to set aside selfish ambitions and act always in the best interest of the company and of those whom who we serve. Difficult? Yes…Impossible…No.

 

G – is for GOING CONCERN. The Board of Directors is responsible for ensuring that the company continues to operate as a going concern. It is a term used in accounting and it means that the Board is confident, or not confident, that the company will continue to be viable for the foreseeable future (usually the next financial year).

 

H – is for HARASSMENT. Harassment in the workplace may take many forms – sexual harassment and coercion, workplace bullying, constructive dismissal, discrimination, whistleblower silencing and retaliation, threats and the list goes on and on. Governing bodies have a responsibility to take appropriate actions to embed the values and behaviours that shape a culture of transparency, accountability, responsibility, fairness and trust.




 

I – is for INDUCTION. This is the process used to introduce or orient a newly appointed Director of the Board to their role. The director is provided with appropriate information about the organization through the use of site visits, meetings with management and, where necessary, training.

 

J – is for JOINT AND SEVERAL LIABILITY. In some contracts, you may see that the parties may be held “jointly or severally liable”. This means that where two or more persons commit an offence, the victim of the wrong-doing can sue any one of the parties for the offence or all the wrongdoers. If you’re running a business as a partnership, for example, it’s important to understand that an action can be brought against you, as an individual, for the wrongful actions of your business partner.

 

K – is for KING’S CODE. Also called the “King IV Report on Corporate Governance”, this is a set of voluntary principles geared toward improved Corporate Governance practices in South Africa. It was first introduced in 1994 by the King Committee, chaired by Mr. Mervyn King. It has been updated multiple times to maintain national and international relevance.

 

L – is for LIMITED LIABILITY COMPANY. This is the most common form of business structure. In a limited liability company, the liability of the member is limited, either to the amount of their unpaid share capital, or to a specific amount guaranteed in the event the company winds up.

 

M – is for MINUTES. Minutes are simply a written account providing records of a meeting. It may take verbatim or summary form, depending on the preference of the governing body. Given that minutes are supposed to be concise, verbatim minutes are often not recommended.




 

N – is for NON-EXECUTIVE DIRECTOR. This is member of the Board who does not have any responsibilities within the organization as an executive manager or employee. Given that Non-Executive Directors or “NEDs” are external to the organization, they are expected to be independent, to offer constructive challenge and to ensure that there is a balance of power at the Board level.

 

O – is for OWNER. Also known as “shareholders’, beneficial owners” and “members”, these include the individuals / institutions who are entered into the company’s register of owners or members as the case may be and those individuals who ultimately own the company. The Board accounts to the owners on how they have been governing the company, typically at general meetings.

 

P – is for PROXY. A proxy is a person authorized by an owner/member/shareholder to vote on his/her behalf at a general meeting. A proxy need not also be a member of the company. Prior to the general meeting, the company secretary will issue proxy forms and instructions as to how the forms are to be completed and submitted.

 

Q – is for QUASI-LOAN. This is a loan where the company reimburses another creditor for expenses incurred by the borrower, usually a director or employee. For example, where the company has agreed to pay a director’s credit card provider for his/her personal expenses. There should be documented policies that restrict the excessive use of quasi-loans.

 

R – is for RELATED PARTY TRANSACTION. This is a transaction by a company with a ‘related party’ such as a major shareholder, director, a company in which a director has an interest or a member of a director’s family. Depending on the company’s size and unique circumstances, related party transactions may be almost impossible to avoid. For example, such transactions are typical in family businesses, yet they must be properly managed to minimize risks to the company.




 

S – is for SUSTAINABILITY. This refers to conducting business in a way that can be continued into the foreseeable future, without using natural resources at such a rate or creating such environmental damage that the viability of the company is threatened.

 

T – is for TRANSPARENCY. This refers to a company being open and honest about historical performance, present conditions and future intentions without trying to hide information.

 

U – is for UNCALLED SHARE CAPITAL. Generally, shareholders are required to pay the company for shares issued to them. Some companies allow shares to be paid for in installments by particular dates. If shares remain unpaid after the designated date for payment, the company may issue a call for payment. The uncalled share capital is the amount that a company can call on before the shares are fully paid for.

 

V – is for VICARIOUS LIABILITY. This refers to liability imposed on a person for the acts or omissions of another person. For example, an employer can be held to be vicariously liable for the actions or omissions of its employees.

 

W – is for WINDING UP. This is another term for liquidation, whereby a company engages the process of ceasing to operate as a business. Winding up can be voluntary or mandatory.

 

Ceronne Bayley LLB MBA is the Lead Corporate Governance Consultant of her own consulting firm, Ceronne Bayley’s Consulting Services. She is a Corporate Secretary by profession and has over fifteen years’ experience working with and advising Boards of Directors of State Enterprises as well as profit and non-profit companies in the private sector.


The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information contained herein are for general informational purposes only. Readers should contact their attorney to obtain advice with respect to any particular legal matter.  No reader should act or refrain from acting on the basis of information in this article without first seeking legal advice from counsel in the relevant jurisdiction.  Only your individual attorney can provide assurances that the information contained herein – and your interpretation of it – is applicable or appropriate to your particular situation.  Use of, and access to this article do not create any professional relationship between the reader and Ceronne Bayley’s Consulting Services.

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