Foundations of Directorship flashcards
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32 cards. Read the term and the definition here. The deck at the top of this page is optional.
- Fiduciary duty
- A legal obligation of directors to act in the best interests of the company, with good faith, care, skill and diligence, and to avoid conflicts of interest.
- Business judgment rule
- A legal principle that protects directors from liability for decisions made in good faith, on an informed basis, without conflict and in the company's best interests.
- Agency theory
- A governance perspective that sees managers as self-interested agents and directors as monitors who align manager interests with shareholder interests through oversight and incentives.
- Stakeholder theory
- A view that directors should consider the interests of all stakeholders-shareholders, employees, customers, suppliers, communities and the environment-not only shareholders.
- Independent director
- A director with no material relationship with the company, its management or major shareholders, free from conflicts that could compromise objective judgment.
- Duty of care
- The duty of directors to act with the diligence, skill and care that a reasonably prudent person would exercise in similar circumstances.
- Duty of loyalty
- The duty of directors to act in good faith in the company's best interests, avoid conflicts of interest, and not misuse their position or company information.
- Board charter
- A document setting out the board's role, responsibilities, composition, meeting procedures and relationship with management and committees.
- Audit committee
- A board committee responsible for overseeing financial reporting, internal control, risk management, external audit and compliance with laws and regulations.
- Remuneration committee
- A board committee that sets executive pay, designs incentive plans, and ensures remuneration is aligned with long-term company performance and risk.
- Nomination committee
- A board committee that identifies director candidates, oversees board composition and succession planning, and manages board evaluation processes.
- Quorum
- The minimum number of directors who must be present at a meeting for the board to validly transact business, as specified in the constitution or law.
- Board evaluation
- A periodic review of board, committee and director performance, often combining self-assessment, peer review and external facilitation every few years.
- Conflict of interest
- A situation where a director's personal, financial or other interest could improperly influence their judgment; the director must declare it and usually recuse from voting.
- Succession planning
- The board's process for identifying and developing potential successors for the CEO, senior executives and key board roles to ensure continuity.
- Risk appetite
- The amount and type of risk a board is willing to accept in pursuit of the company's strategic objectives, often expressed in qualitative and quantitative terms.
- Three lines model
- A risk governance framework: management owns risk (first line), risk and compliance functions monitor it (second line), and internal audit provides independent assurance (third line).
- Current ratio
- A liquidity measure calculated as current assets divided by current liabilities; it indicates the company's ability to meet short-term obligations.
- Debt-to-equity ratio
- A leverage measure calculated as total liabilities divided by total equity; it shows the proportion of financing provided by creditors versus shareholders.
- Return on equity
- A profitability measure calculated as net income divided by average shareholders' equity; it shows how efficiently equity is used to generate profit.
- Going concern
- The assumption that a company will continue operating for at least twelve months; directors must assess and disclose material uncertainties if the assumption is in doubt.
- Internal control
- Processes designed to provide reasonable assurance of reliable financial reporting, effective operations and compliance with laws and regulations.
- Key audit matter
- A matter that, in the auditor's professional judgment, was of most significance in the audit of the financial statements, disclosed in the audit report.
- Risk treatment
- The process of selecting and implementing measures to modify risk, typically by avoiding, reducing, transferring or accepting it.
- Code of conduct
- A formal statement of the ethical standards and behaviors expected of directors, employees and other representatives of the company.
- Whistleblower protection
- Legal and organizational safeguards that allow individuals to report misconduct confidentially and without fear of retaliation.
- Tone at the top
- The ethical culture and values demonstrated by the board and senior management, which shape behavior throughout the organization.
- Stakeholder engagement
- The process of identifying, communicating with and responding to the concerns of parties affected by the company's activities.
- Materiality
- The threshold at which information could influence the economic decisions of users; it determines what must be disclosed in reports.
- Modern slavery
- Forms of exploitation such as forced labor, debt bondage, human trafficking and child labor; boards must ensure supply chain due diligence and reporting.
- Reputation risk
- The risk that negative stakeholder perceptions arising from ethical failures, poor conduct or operational incidents will harm the company's value and relationships.
- Sustainability reporting
- Disclosure of environmental, social and governance performance using frameworks such as GRI, SASB or TCFD, based on materiality to stakeholders.