CMA Sri Lanka SL4 Corporate Governance & Ethics Exam key terms

A framework explaining the relationship where shareholders (principals) delegate decision-making to managers (agents), creating potential conflicts of interest and costs that governance mechanisms such as boards, incentives and disclosure are designed to control.

A view holding that a company should be managed in the interests of all parties affected by its activities, including employees, customers, suppliers, communities and lenders, not only shareholders.

A perspective assuming managers are trustworthy stewards who gain satisfaction from organisational success, so governance should empower rather than monitor them intensively; often used to justify combining chair and CEO roles.

The risk that an agent pursues personal goals, or shirks effort, instead of acting in the principal's interest, arising from information asymmetry and divergent incentives between owners and managers.

The total expense of aligning agent behaviour with principal interests, covering monitoring costs such as audit and board oversight, bonding costs borne by managers, and residual loss from remaining divergence.

A situation where one party, typically management, holds more or better information about the company than another, such as shareholders or lenders, undermining informed decision-making and enabling opportunistic behaviour.

The doctrine that directors should maximise long-term shareholder value and that other stakeholder interests are secondary, subject only to legal and contractual obligations.

An approach, embedded in some company law, requiring directors to promote company success for members while having regard to employees, suppliers, customers, community and environment.

Internationally recognised, non-binding standards covering shareholder rights, equitable treatment, stakeholder roles, disclosure and transparency, and board responsibilities, used by regulators as a benchmark for national codes.

A regulatory technique requiring listed companies to follow a governance code's provisions or publicly disclose and justify any departure, allowing flexibility instead of rigid statutory rules.

The extent to which directors are free from relationships, financial interests or past employment that could materially influence their judgement, enabling objective oversight of management.

A board member with no material business, family, employment or advisory relationship with the company or its management, expected to bring impartial scrutiny to strategy, performance and accountability.

A board member who is not part of the executive management team and receives no salary from the company apart from directors' fees, providing oversight and an external perspective.

A director who also holds a management position in the company, such as chief executive or finance director, and is therefore involved in day-to-day operations and accountable to the board.

A governance arrangement in which different individuals lead the board and the executive team, preventing concentration of power and supporting objective board challenge of management.

The degree to which a board performs its oversight, strategy and accountability roles well, shaped by composition, skills mix, diversity, information quality, meeting dynamics and evaluation.

The mix of genders, ages, ethnicities, professional backgrounds and tenure on a board, valued for broadening debate, reducing groupthink and better reflecting stakeholders and markets served.

A structured periodic review of board, committee and individual director performance, often externally facilitated, used to identify skill gaps, improve dynamics and inform reappointment decisions.

A deterioration in decision quality when a cohesive group suppresses dissent and fails to test alternatives critically, a risk mitigated by diversity, independent directors and formal challenge.

A board committee, normally of independent non-executive directors, responsible for overseeing financial reporting, external audit, internal audit and internal control, and for receiving whistleblowing reports.

A board committee that identifies and recommends director candidates, assesses board skill needs and succession plans, and promotes diversity, reducing management influence over board appointments.

A board committee of independent directors that sets executive pay and incentive structures, aligning rewards with long-term performance and avoiding conflicts of interest in setting directors' own pay.

The freedom of the statutory auditor from relationships or non-audit service fees that could compromise objectivity, safeguarded by rotation, audit committee approval and fee disclosure.

A director's obligation to act with the diligence, knowledge and judgement a reasonably prudent person would apply in comparable circumstances, including preparing for and attending meetings.

A director's obligation to act honestly and in the best interests of the company as a whole, subordinating personal interests and avoiding improper purposes.

A director's obligation to disclose any personal interest in a transaction, refrain from voting on it and, where appropriate, abstain from the relevant board discussion.

A legal protection under which courts defer to directors' informed, good-faith business decisions, even if harmful in hindsight, provided no fraud, illegality or conflict of interest is involved.

A transaction between the company and a director, major shareholder or their close associates, requiring disclosure, independent approval and arm's-length terms to prevent value extraction.

The policies, procedures and systems designed to give reasonable assurance about reliable reporting, effective operations and compliance, comprising control environment, risk assessment, control activities, information and monitoring.

A widely used model for designing and assessing internal control over financial reporting, organised around control environment, risk assessment, control activities, information and communication, and monitoring activities.

An independent, objective assurance and consulting function that evaluates risk management, control and governance processes and reports functionally to the audit committee to preserve its independence.

A structure in which operational management owns and manages risk, a risk and compliance function monitors it, and internal audit provides independent assurance to the board and audit committee.

The amount and type of risk an organisation is willing to accept in pursuing its objectives, set by the board and translated into tolerances and limits that guide decision-making.

The coordinated process of identifying, assessing, prioritising and responding to uncertainties that could affect objectives, embedding treatment and monitoring within everyday operations and strategy setting.

Systematic dialogue with groups affected by or affecting the company, used to understand expectations, manage reputational risk and inform strategy and reporting.

The timely release of accurate, material information about financial position, governance and performance so that investors and other users can make informed decisions and hold the board accountable.

Openness in communicating decisions, their basis and their consequences, allowing outsiders to see how the company is governed and to assess management's stewardship of resources.

A reporting approach that explains how strategy, governance, performance and prospects create value over time across financial, manufactured, intellectual, human, social and natural capitals.

An ethical theory judging actions by their consequences, holding that the right choice produces the greatest overall benefit or least harm for the greatest number of affected parties.

An approach holding that certain duties and rules bind regardless of outcomes, so an act such as lying or bribery is wrong even if it produces good consequences.

A character-based approach asking what a person of integrity, honesty and courage would do, focusing on developing good dispositions rather than on rules or consequences alone.

A structured process of recognising an ethical issue, gathering facts, identifying stakeholders and options, applying ethical tests, choosing and then reviewing the outcome.

A situation in which competing values or duties make any available choice involve some ethical cost, requiring reasoned judgement rather than simple rule-following.

A formal statement of an organisation's values, principles and expected behaviours, with guidance and consequences, intended to guide conduct and build trust with stakeholders.

A practical set of rules describing acceptable and prohibited behaviours in specific situations, such as gifts, conflicts of interest and use of company assets, usually supporting a broader code of ethics.

The signals sent by senior leaders through their own behaviour, priorities and responses to misconduct, which shape whether ethical standards are taken seriously throughout the organisation.

The shared values, beliefs, norms and behaviours that determine how work is done and how people treat each other, customers and regulators, often described as the organisation's personality.

The disclosure by an employee or insider of suspected wrongdoing, such as fraud, safety breaches or bribery, to an internal channel or a regulator, protected when made in good faith.

Legal and organisational safeguards, including confidentiality, anonymous reporting lines and anti-retaliation rules, that shield a person who reports wrongdoing in good faith from dismissal or detriment.

A situation where a person's private interest could improperly influence their professional judgement, requiring disclosure, recusal or independent approval to protect the organisation's integrity.

The statutory regulator of the Sri Lankan securities market, which issues and enforces the Code of Best Practice on Corporate Governance and administers listing-related disclosure requirements.

A joint institute-and-regulator code applying to listed companies in Sri Lanka, structured around shareholders, stakeholders, directors, remuneration, audit and disclosure, operating largely on a comply-or-explain basis.

The principal Sri Lankan company law statute, setting out directors' duties, solvency and related party rules, shareholder rights and reporting obligations for companies incorporated in Sri Lanka.

The professional accountancy body in Sri Lanka that co-issues the Code of Best Practice on Corporate Governance and promotes auditing and ethical standards for its members.