A Glossary of Governance Terms

The information contained in this glossary is provided for informational purposes only, and should not be construed as legal or financial advice on any subject matter.

In the last couple of weeks, Eliott Teissonniere and I enjoyed working on this glossary of governance terms relating to governments, governance and governing principles.

Abnormal Accruals: The difference between accrued income and cash flows.

Accountability: Responsibility for actions.

Accountability Chain: The chain of accountability from staff to the Board.

Accounting Manipulation: The intentional manipulation of financial records to inflate the entity’s financial position.

Accounting Restatement: A revision of a prior financial statement to correct a material error which could result, without limitation, from a clerical error, accounting mistakes, noncompliance with generally accepted accounting principles, fraud, and/or misrepresentation.

Accredited Investors: A sophisticated investor who meets income or net worth requirements in their jurisdiction to invest in certain funds. For example, in the US, accredited investors are investors with at least $1 million in investable assets or $200,000 in annual income.

Accrued Income: Income that is earned but has not been received.

Active Investors: Investors who are active in the trading of the entity’s securities.

Activist Investors: Investors who are actively pursing governance changes at a corporation, including, without limitation, individual investors without outspoken personal beliefs, and social impact funds.

Advisory Nonbinding Vote: On January 25, 2011, the Securities and Exchange Commission adopted amendments to its disclosure rules and forms to implement Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which added Section 14A to the Exchange Act. These amendments are effective April 4, 2011. The new section requires public companies subject to the federal proxy rules to:

• provide their shareholders with an advisory vote on executive compensation, generally known as “Say-on-Pay” votes;
• provide their shareholders with an advisory vote on the desired frequency of say-on-pay votes; and
• provide their shareholders with an advisory vote on compensation arrangements and understandings in connection with merger transactions, known as “golden parachute” arrangements. Such golden parachute arrangements would need to be disclosed in merger proxy statements.

Agency Problem: Conflict of interest that arises when a third party agent is hired to act in the best interest of the principal such as conducting in actions that benefit the agent instead with costs paid by the principal.

Aligned Incentives: Leadership goals and respective compensation align with interest of shareholders.

Alternative Trading System: A regulated trading system that brings together purchases and sellers of securities or cryptocurrencies.

Amortization: Accounting method utilized to lower the book value of an intangible asset over a set period of time.

Amortization Schedule: A schedule used to reduce the current amount of a loan through installment payments. The formula may be:
Total Monthly Payment = Loan Amount [ i (1+i) ^ n / ((1+i) ^ n) — 1) ] where i = monthly interest rate and n = number of payments over the loan’s lifetime.

Amortization of Intangibles: The process of expensing the cost of intangible asset over the life of an asset. For example, in the United States, the following are Section 197 intangibles and must be amortized over 15 years:

1. Goodwill
2. Going concern value.
3. Workforce in place.
4. Business books and records, operating systems, or any other information base, including lists or other information concerning current or prospective customers.
5. A patent, copyright, formula, process, design, pattern, know-how, format, or similar item.
6. A customer-based intangible.
7. A supplier-based intangible.
8. Any item similar to items 3 through 7.
9. A license, permit, or other right granted by a governmental unit or agency (including issuances and renewals).
10. A covenant not to compete entered into in connection with the acquisition of an interest in a trade or business.
11. Any franchise, trademark, or trade name.
12. A contract for the use of, or a term interest in, any item in this list.

Anglo-Saxon Model: Description of governance models in the United States and the United Kingdom, which focus on the purpose of maximization of the shareholder value with a board of directors, board participation and disclosure and transparency through audited financial reports.

Annual Bonus: Compensation payment, usually a percentage of base salary, awarded to an executive if anual company performance exceeds set financial targets and KPIs.

Annual Salary: Fixed cash compensation payment made throughout one year.

Asset Tokenization: Security token that represent direct ownership in an asset or though a derivative. Examples include stocks, futures, options, art, IP and real property.

Assumptions: An intrinsic valuation, assumptions include tax rate, discount rate and perpetual growth rate.

Assurance: Confidence and comfort provided to stakeholders by an entity.

Audit Committee: One of the major operating committees of an entity’s board of directors in charge of overseeing the entity’s external audit to prevent fraud and manipulation. In the United States, under Sarbanes-Oxley, the chair of the audit committee must be a financial expert and comprised of at least three (3) financially literate members. Audit committee responsibilities include:

• Overseeing the financial reporting and disclosure process
• Monitoring choice of accounting policies and principles.
• Overseeing the hiring, performance and independence of the external auditor
• Overseeing regulatory compliance, ethics, and whistleblower hotlines.
• Monitoring internal control process
• Overseeing the performance of the audit function
• Discussing risk management policies and practices with management

Bankruptcy: Legal proceeding in which an entity becomes insolvent, allowing it to become free from its debts while maximizing the financial claims of its creditors.

Benefits: Compensation benefits provided with employment such as health insurance, retirement benefits, etc.

Benchmarking Compensation: Process by which compensation salary and benefits of executives are compared to other companies in same or similar market or industries.

Best Practices: A set of guidelines that represent the most efficient or prudent course of action to improve an outcome across a large number of entities.

Blackout Period: A period of time during which insiders of an entity are restricted from trading in their own stock. Blackout periods are generally specified in an entity’s insider trading policy.

Black-Scholes Pricing Model (Black-Scholes-Merton Model): A mathematical model for pricing an options contract which estimates a financial instruments’ variation over time, assuming that it will have a lognormal distribution of prices. To arrive an an estimated value, it relies on expected volatility, interest rates, dividends, current stock price, strike price and time to expiration.

Blank Check Preferred Stock: A class of unissued shares of preferred stock provided for in the articles of incorporation, which sets forth the maximum number of shares of preferred stock that will be authorized and issued, giving direct authority to the board of directors for voting rights, preferences and restrictions on such shares. Blank check preferred stock may be structured to grant more voting power to shareholders or as takeover defense in the event of a hostile bid or ownership.

Blockholder: A shareholder with at least a 1 to 5 percent stake of an entity. Blockholder with large ownership positions can exert significant influence on the governance of an entity.

Board Evaluation: The process of evaluating the entire board, its committees or individual directors pertaining to their effectiveness in carrying their respective responsibilites. In the United States, annual board evaluations are a listing standard in the New York Stock Exchange, which requires that the nominating and governance committee oversee broad evaluation. The audit, compensation and nominating and governance committees are required to perform their own self evaluation.

Board of Directors: An elected group of individuals that represent the interest of shareholders and monitor the entity and its management including hiring and firing of personnel, dividend policies and payouts and executive compensation. In its advisory role, the board consults with management regarding the strategic and operational direction of the entity. In its oversight role, the board monitors management and ensures that it acts diligently in the interest of the shareholder.

Board Structure: The structure of a board including its size, director background, independence from management, number of committees, director compensation and such information.

Broker Nonvote: An event where the broker does not receive instructions from the shareholder within ten (10) days of the vote date after the broker had forwarded stock to the shareholder because they must vote according to the shareholder’s instructions (Stock held at a brokerage firm are registered under the name of the brokerage even though they are beneficially owned by the shareholder).

Bullet Dodging: Awarding stock options to an employee after the release of unexpected negative news that drive down the price of a stock.

Burn Rate: The ratio of shares granted through an entity’s equity-based compensation plan and the number of outstanding or authorized shares.

Business Judgment Rule: A rule in which a court will not second guess a board’s decision if the board has demonstrated that it followed a reasonable process by educating itself of key facts and then making a decision in good faith.

Business Model: An entity’s plan for making a profit, identifying the products and/or services, target market and any anticipated expenses.

Busy Director: A director who sits on three (3) or more boards.

Busy Board: A board in which a significant number of Busy Directors.

Bylaw: One of the rules the entity established for itself and that it will follow.

Capital Market Efficiency: The degree to which markets set accurate pricing for labor, resources and capital based on available information to both parties in a transaction so that the parties could make better, rational decisions about capital allocation.

Cease-and-desist Order under the FCPA: An order giving by a regulatory agency to stop any suspicious or illegal activities. In the United States, the Foreign Corrupt Practices Act of 1977, as amended, 15 U.S.C. §§ 78dd-1, et seq. (“FCPA”), was enacted for the purpose of making it unlawful for certain classes of persons and entities to make payments to foreign government officials to assist in obtaining or retaining business.

CEO: Chief Executable Officer who is accountable to the Board for management, operation and performance of an entity.

CFO: Chief Financial Officer who is responsible for managing the finances of the company.

CGO: Chief Governance Officer who is accountable to the Board for the design, structure, implementation and performance of its governance principles.

Chaebol: In Korea, groups of affiliated companies that operate under the strategic and financial direction of a central headquarter in which a chairman holds ultimate decision-making authority. Chaebol means “financial house.”

Chairman of the Board: The most powerful board member who presides over meetings of the full board of directors who are responsible for setting the agenda, scheduling meetings and coordinating actions of board committees.

Check the Boxes: The mentality of checking off an arbitrary list of criteria without giving thoughts to whether such criteria improve shareholder value.

Civil Law: Known as “code law,” a system of law that relies on legal codes or statutes written by legislative bodies.

Classified Board Structure (Staggered): A board structure in which directors are elected to multiple-year terms with only a subset of directors standing for reelection each year. Staggered boards may be effective antitakeover defenses if they are part of the entity charter.

Clause 49 (India): The standard of corporate governance in India that applies to all listed companies is set forth in Clause 49 of the Listing Agreement. Key provisions include the following:
- Board composed of a majority of independent directors
- Certification of financial statements by CEO and CFO
- Cap of 10 committees across all boards for board members
- Audit committee composition of at least three members, of which two are independent
- If the Chairman is an executive, at least 50% of the directors must be independent
- If the Chairman is not an executive, at least 1/3 of the directors must be independent
-Disclosure requirements for director compensation, related party transactions and any potential conflicts of interest

Clawbacks: Provisions in executive compensation agreements that require an executive to return compensation (such as bonuses) already paid by the company if it is clear that bonus compensation should not have been awarded prior. Such provisions deter fraud, misconduct, poor performance and/or a drop in profits. In the United States, the Dodd-Frank Wall Street Reform Act requires that companies structure, implement and disclose clawback policies.

Code of Best Practices: A set of best practices recommended by experts on corporate governance. Examples include:
- The Cadbury Committee
- The Greenbury Report
- The Hampel Report
- The Higgs Report
- The Turnbull Report
- The Smith Report

Codetermination: A system where employees have the right to vote for representatives onto the board of directors in a company. Aligning the interest of both the shareholders and the employees, such system is designed to reduce conflict between employees and executives, provide employee leverage and correct market failures. Germany utilizes codetermination, for instance, in its corporate structure.

Compensation Committee: A committee of an entity’s board of directors in charge of executive compensation and the compensation of the CEO. In the United States, the Compensation Committee is comprised of independent, outside directors. Compensation committee responsibilities include, without limitation, the following:
-reviewing and approving corporate goals and objectives relevant to the compensation of the CEO, evaluating the performance of the CEO relative to targets, and determining and approving the CEO’s compensation based on such evaluation
-setting the compensation of the Board and hiring consultants to assist, as appropriate
-reviewing and making recommendations to the Board with respect to the company’s compensation strategy to ensure that it is appropriate to attract, retain and motivate executives
-issuing an annual report on executive compensation for inclusion in the proxy statement
-overseeing and advising the Board on the adoption of policies that govern the company’s compensation programs including stock and benefit plans

Compensation Discussion and Analysis (CD&A): The purpose of the Compensation Discussion and Analysis is to provide investors material information that is necessary to understand the company’s executive compensation programs.

Common Law: Common law, or case law, is a body of unwritten laws based on legal precedents established by the courts. Judges consider and use previous court rulings on similar matters as a basis for determining current claims.

Compliance: The act of ensuring that an organization’s activities conform and comply with applicable laws and regulations.

Compliance Risk: The degree to which a company conforms and complies with applicable laws and regulations including labor practices, governance, products, publicly listed securities, and environmental practices.

Comply or Explain: A system of governance under which public companies are required to issue an annual statement to shareholders explaining whether they are in compliance with recommended governance standards or stating their reasons for their noncompliance if they are not. Originated in the United Kingdom, this approach allows companies to deviate if such standards are not relevant to their company.

Conflict of Interest: Competing loyalties where your loyalty to the organization is compromised.

Consensus: A general agreement (for instance, the board reaches consensus when its members agrees on a certain topic).

Consensus Algorithm (or Protocol): The set of rules or the algorithm followed by a distributed system to achieve a consensus. For Blockchains this is generally used to decide what blocks and transactions are added to the network.

Constitution: A set of principles which an entity or organization will follow no matter what. This typically would define what kind of rules are acceptable or not.

Control Mechanism: An internal control system that a company puts in place to ensure that assets inside the company is consistent with recorded revenue, financial statements and allocation data through the accounting system.

Corporate Defense: Security measures and programs to protect the interest of the company from risks, threats and other vulnerabilities.

Corporate Defense Mechanism: Framework by a company to manage its corporate defense program including its governance, security, compliance, risk, controls and assurance activities.

Corporate Governance: A system of check and balances consisting of at least a board of directors to oversee management and an external auditor for its financial statements.

Corporate Governance Ratings: Rating systems developed to grade the quality of a company’s corporate governance. Such rating systems could be qualitative and quantitive assessments.

Corporate Monitors: Parties hired to monitor the company, who can be internal such as internal auditors or external such as analysts and regulators.

Corporate Strategy: The process by which a company intends to create long term value for its stakeholders including defining its business model and setting its Key Performance Indicators.

Council: A group of persons who serve as representatives of the public to establish policies for local government.

Creditworthiness: Quantitive and qualitative assessment of a borrower’s ability and willingness to repay debt obligations considering collaterals, leverage ratios, interest coverage, revenues and other factors.

Cumulative Voting: A system of proxy voting where a shareholder is given a number of votes equal to the number of shares owned times the number of board seats. It allows a shareholder to concentrate more votes on a single candidate or a subset of candidates.

Custodian: Cryptocurrency solutions that safeguard cryptocurrency assets by providing storage and security services for investors, exchanges and companies who hold large amounts of bitcoin and cryptocurrency.

Decentralized Autonomous Organization (DAO): An organization that can run on its own (in autonomy), with no central leadership and that can manage its own funds and decisions in autonomy.

Decentralized Exchange: The decentralized equivalent of an exchange, usually runs on a Blockchain through a set of smart contracts.

Delegated Proof Of Stake: A derivative set of Proof Of Stake algorithms in which smaller token holders can delegate their stake to bigger holders thus increasing their chances to be selected.

Democracy: A form of governance where decisions are taken after a majority vote of the participants.

Derivative Token (Future): Contract to execute a transaction at a specified price in the future.

Derivative Token (Options): Provision of a right to buy or sell the Security Token at a specified price on a specified date.

Derivative Token (Swap): The exchange of the dividends produced by two Security Tokens to serve as a hedge against future market position.

Director’s and Officer’s Liability Insurance (D&O): Company insurance purchased on behalf of directors and officers to protect them from certain liability, which covers the cost of litigation, settlements and the amount paid in damages as well as reimbursement for its indemnification obligations.

Discounted Cash Flows: An intrinsic valuation, statement of cash flows.

Dodd-Frank Wall Street Reform and Consumer Protection Act 2010: US federal legislation passed in 2010 in response to the 2008 financial crises to promote the financial stability of the United States by improving accountability and transparency in the financial system. Dodd-Frank provisions also include accountability in executive compensation and the strengthening of corporate governance:
-Disclosures including executive compensation, hedging of company equity, independent compensation committee directors, and chairman selection
-Proxy access in which shareholders can nominate directors on the company proxy
-Say-on-pay in which shareholders have a nonbinding vote on executive compensation.

Do-ocracy: Organizational structure that is governed by individuals who perform the work.

Dual-class shares: More than one class of common stock in which economic interest is equal but not voting rights. For example, preferential voting rights may provide the shareholder with significant influence over board elections. Thus, it is an effective defense against takeover attempts as it weakens the influence of public shareholders.

Duty of Candor: A fiduciary duty under state corporate law that requires that the Board and the management of the company to inform shareholders of all material information important to the evaluation of the company and its management in a timely, complete and accurate manner.

Duty of Care: A fiduciary duty under state corporate law that requires that a director makes decisions generally based on a business judgment rule, with reasonable deliberation.

Duty of Loyalty: A fiduciary duty under state corporate law that requires that a director makes decisions in the interest of the company and shareholders and avoids any potential or actual conflict of interest.

Easement: A property right to use and/or enter onto the real property of another without possession.

Earned Pay: The amount and total value of compensation an executive keeps such as cash actually received and equity grants without vesting restrictions. For example, salary and annual bonuses are earned over one year periods. Equity awards are earned as they vest.

Earnings Management: A potential governance problem when financial results are manipulated to meet or exceed quarterly forecasts.

Empire Building: A type of agency problem that effective governance systems would prevent, empire building is when management seeks to purchase another company for the sole purpose of managing a larger enterprise.

Empirical Testing: The process of testing a hypothesis through observation in the real world such as field studies, individual case studies and large sample statistical testing.

Equity Tokenization: Security tokens that represent outstanding debt, where value is based on interest rate and creditworthiness. Examples include bonds, mortgages, loans and debentures.

Event Studies: Studies which measure the stock market’s reaction to events to determine whether governance changes are increasing or decreasing value to shareholders.

Excess Returns: The rate of return that exceeds what was expected and is a measurable way to determine whether the skill of an investor has added value to a portfolio on a risk-adjusted basis.

Exchange: A place where people can trade tokens against various currencies. Traditionally operated by a single, centralized company.

Executive Compensation: Total compensation such as cash, bonuses and stock offered to an executive to attract, retain and motivate such executive to achieve corporate objectives.

Executive Session: A meeting of the Board with only independent nonexecutive directors to discuss management performance, operating results, internal controls and succession planning. In the United States, under Sarbanes Oxley, the Board is expected to hold at least one Executive Session per year.

Expected Pay: The total expected value of compensation promised to an executive in a given year, comprising of the executive’s annual salary, expected value of the annual bonus, expected fair market value of any equity grants and any long term incentive cash plans.

Facilitating Payments: A payment to a foreign official, political party or party official for “routine governmental action” as defined by the Foreign Corrupt Practices Act (FCPA) of 1977, as amended, intended to influence the timing of the official’s action. Examples of this exception from the anti-bribery prohibitions include making a payment to an official to expedite the processing of papers or the issuance of permits, actions that the official is already bound to perform.

Fiduciary Duty: A fiduciary duty under state corporate law that requires that a director acts in the interest of the company and its shareholders. The fiduciary duty includes a Duty of Care, a Duty of Loyalty and a Duty of Candor.

Financial Accounting Standards Board (FASB): A nonprofit organization that determines accounting standards in the United States.

Financial Expert: A member of the Audit Committee as required by Sarbanes Oxley with financial sophistication, usually the chair of the audit committee with the following experience and expertise:
- Prior CEO, CFO or a senior executive with finacial oversight responsibilities
- Past employment experience in finance and accounting , requisite professional certification in accounting
- Prior experience as public accountant, auditor, principal financial officer, controller or principal accounting officer
-Understanding of accounting principles, financial statement preparations, internal controls and audit committee functions

Financial Reinstatement: When a material error is discovered in a company’s previously published financials, the company is required to file a Form 8-K as a notice to investors that previous published financials cannot be relied upon and are being restated.

Financial Risk: The degree of risk associated with the company’s reliance on external financing such as private lenders and capital markets to fund its operations instead of using revenue and other internal generated funds.

Foreign Corrupt Practices Act (FCPA): United States legislation that prohibits a company to offer payments to foreign officials for the purpose of obtaining or retaining businesses on a know or should have known basis.

Fork: The name of an event when the nodes of a blockchain network accept a different block for the same slot.

Fractional Ownership: A percentage of a cryptocurrency is owned. In addition, a fraction of rights may be owned.

Friendly Acquisition: A situation in which a company is open to receiving a takeover offer from a third party.

Futurarchy: A new form of governance where elected officials defines measures that are then passed to Prediction Markets to determine if they should be applied or not depending on their potential to have a positive effect on the country or company.

Generally Accepted Accounting Principles (GAAP): Set of accounting principles that determine how companies are expected to record business transactions.

Golden Handcuff: Financial incentives intended to attract, retain and motivate employees to remain with the company such as employee stock options with a longer vesting period or contractual provisions requiring employees to return certain compensation if the employee leaves before a certain date.

Good Faith: The intention by which an actor acts without conflict of interests and without willful blindness to issues within its responsibilities.

Governance: Principles and rules that govern an entity or organization causing it to achieve its mission and values

Governance Committee: A committee designated to assist in the oversight of the quality of an entity’s governance.

Governance Model: A framework within which an entity organizes the principles, values and missions that is developed for the research, analysis and synthesis of the governing process, commonly defined by a set of bylaws.

Hard Fork: When a fork on a blockchain network is created voluntarily. Typically, this could be used for protocol upgrades.

Hedge: A contract used to preserve the value of a common stock position. Because hedges could be used to trade on the basis of inside information and because they change the incentive value of an executive compensation program, a company’s insider trading policy may restricting the timing and ability of executives to hedge their stock positions.

Herding Behavior: A behavior among executives to copy the decisions of other companies without regards to company economics, context or strategy.

High-water Mark: A provision that prohibits a hedge fund from charging a performance fee unless the investor’s account value is at its highest level to prevent hedge funds from double charging if the fund’s value rises, falls and then rises again.

Holocracy: A form of corporate governance where members of a team form distinct, autonomous but symbiotic teams to accomplish tasks and goals defined by their company.

Horse Race: A succession planning model in which two more internal candidates are promoted to senior positions where they compete to become the next CEO.

Hostile Takeover: A circumstance in which a company resists being acquired by an unsolicited bidder or corporate raider. Such defense mechanisms include a staggered board structure, a poison pill, dual class shares, or blank check preferred stock.

Howey Test: The US Supreme Court used the Howey test to determine whether the arrangement is a security or not with four elements: 1) an investment of money; 2) in a common enterprise; 3) with the expectation of profits; and 4) from the efforts of others.

Hubris: Description of the overconfidence of a company’s management.

Independence: Freedom from conflicts of interest that impair objectivity. Independence is defined by the New York Stock Exchange as a director who has “no material relationship with the listed company (either directly or as a partner, shareholder, or officer of an organization that has a relationship with the company).” Additionally, Item 407(a) of Regulation S-K set forths that a director is not independent if
“(i) The director is, or has been within the last three years, an employee of the listed company, or an immediate family member is, or has been within the last three years, an executive officer, of the listed company.
(ii) The director has received, or has an immediate family member who has received, during any twelve-month period within the last three years, more than $120,000 in direct compensation from the listed company, other than director and committee fees and pension or other forms of deferred compensation for prior service (provided such compensation is not contingent in any way on continued service).
(iii) (A) The director is a current partner or employee of a firm that is the listed company’s internal or external auditor; (B) the director has an immediate family member who is a current partner of such a firm; (C) the director has an immediate family member who is a current employee of such a firm and personally works on the listed company’s audit; or (D) the director or an immediate family member was within the last three years a partner or employee of such a firm and personally worked on the listed company’s audit within that time.
(iv) The director or an immediate family member is, or has been with the last three years, employed as an executive officer of another company where any of the listed company’s present executive officers at the same time serves or served on that company’s compensation committee.
(v) The director is a current employee, or an immediate family member is a current executive officer, of a company that has made payments to, or received payments from, the listed company for property or services in an amount which, in any of the last three fiscal years, exceeds the greater of $1 million, or 2% of such other company’s consolidated gross revenues.”

Independent Chairman: A chairman of the Board that is not an executive of the company and who meets the independence standards set forth by the New York Stock Exchange.

Inefficient Market: A market that fails to incorporate all available information to reflect an asset’s fair price due to information asymmetries, transaction costs, market psychology and human emotions, resulting in over or under valued prices.

Insider Trading: The use of non public information for outside business or other personal gain.

Integrity: Trust between an organization, machines and human.

Intelligence: A process in which a company makes the right decision by using its data, processes and systems.

Interlocked Boards: Companies with senior executives who sit reciprocally on each other company’s Boards.

Internal Controls: Internal processes developed by company to ensure account balances are recorded accurately, financial statements are produced and assets are protected.

Keiretsu: A system prevalent in Japan in which companies maintain small ownership positions among customers, suppliers and affiliates along the supply chain with shared financial success.

Key Performance Indicators (KPIs): Financial and nonfinancial metrics used to validate the current and future performance of a company. Examples of financial KPIs include total return, revenue growth, earnings per share, earnings before interest, taxes, depreciation and amortization, return on capital, economic value added and fresh cash flow. Nonfinancial KPIs include employee satisfaction, customer satisfaction, defects and cure, on time delivery, worker safe, and environmental safety.

Know Your Customer (KYC): Regulatory requirement to know your customer to prevent money laundering and onboarding accredited investors.

Labor Market Efficiency: The process by which the available supply of talent is matched with demand. When labor market is efficient, the Board will have information to evaluate and price executive talent, leading to improved hiring decisions and reasonable compensation packages.

Lead Independent Director: An independent director designated as a lead director to represent the rest of the directors intending to structure an independent review of management especially in companies where the CEO is also the Chairman of the Board. Such lead director is vital in evaluating corporate performance, succession planning, director recruitment as well as in times of crises such as regulatory scrutiny, hostile takeover attempts and proxy battles.

Liquid Democracy: A form of democracy where it is possible for one to vote by themselves or delegate their voting power to someone else; and it works very well with Token Weighted Votes.

Liquidity: A large volume of orders in the market, enabling the ability to buy and sell large positions within a short period of time.

Lockup: The period of time a shareholder or token holder cannot trade.

Long-term Incentives: Compensation, cash or otherwise, that vests over multiple years and rewards an executive for long term performance. Stock options, restricted stock and performance units are examples of long-term incentives.

Majority Voting: A system of proxy voting which a director is required to receive a majority of votes to be elected, giving shareholders more influence over the composition of the Board.

Malfeasance: Dishonest, fraudulent and/or improper actions or behaviors.

Management and Supervisory Boards: Under German law, a two-tiered board structure, whereas the management board is responsible for making decisions on strategy, product development, finance, marketing, supply chain and distribution while the supervisory board oversees the management board.

Management Entrenchment: The degree to which management of the company is protected from performance standards and market conditions to which they are typically held accountable. They are able to retain employment despite poor performance or opposition from the shareholders, for example.

Mark-to-Market (MTM): A method of measuring the fair value of assets and liabilities that fluctuate over time, intending to provide a realistic appraisal of a company’s current financial situation based on current market conditions. Mark-to-Market is required under GAAP reporting.

Market for Corporate Control: When a company is in the market for mergers and acquisitions. Change of control includes a change in ownership; material changes in strategy; and change in cost and capital structures.

Market-to-Book Ratio: An indicator of a company’s value. The ratio of the stock market value (share price in the stock market and the number of outstanding shares) to the accounting value (historical cost) of its equity.

Market Maker: A participant (either an individual or company) on an exchange that buys and sells tokens in an attempt to make profit from it. Usually relies on bots to do so and used by projects to stimulate their token’s popularity on exchanges (due to the higher number of buy and sell orders).

Membership: Members of an entity, organization, committee, institute, club or any working group, usually with a specific purpose.

Member Substitution: The ability for a voting member to appoint a third party to attend meetings on the voting member’s behalf.

Moral Compass: The degree to which individuals have the integrity to discern wrong actions from right, refraining from self-interested behaviors on moral grounds.

Multi Signatures (or Multisig) Wallet: A specific kind of wallet that requires the approval of various members (or signatories) before executing transactions. This can also be approached as a basic form of decentralized organization.

Nominating and Governance Committee: A committee of the Board that is responsible for identifying qualified potential directors to serve on the Board; selecting, evaluating and nominating new directors to be put before a shareholder vote at the annual meeting; leading the succession planning process for CEO; determining governance standards; and managing the CEO and board evaluation process.

Nonshareholder Interests (Constituency Statute): A statute or rule that requires the Board to balance the interests of all the stakeholders in the company instead of focusing heavily and solely on maximizing shareholder value. Such rules are intended to allow the Board to reject a takeover offer if the offer aligns with the shareholders’ interest but would harm other stakeholders and constituents.

Notional Value: A term used to describe derivative contracts in the options, futures and currency markets to mean the total value of the underlying assets in a leveraged position. Notional value is determined by multiplying the contract size with the underlying price. The amount of leverage can be determined by dividing the notional value by the market value. Because a small amount of invested money can control a large position and have huge consequences for the investor, notional value is critical in helping assessing portfolio risk.

Observer Directors: Advisory directors who participate in board meetings who advise the company on strategy, finance, investment and other important matters. Such directors are not formally elected to the Board so they are protected from potential liability that comes with being an elected director.

Operational Risk: The degree to which a company is exposed to disruptions and other risks in its operations such as concentration of buyers or suppliers, redundancy in its supply chain, the lack of succession planning, etc.

Operational Succession Plan: The succession plan a company has developed for the CEO role, with internal candidates identified. Best practices including finding board members with prior succession experience, designing an emergency plan as a well as a long term plan, identifying blockers and creating a smooth onboarding experience for the successor.

Organizational Ambidexterity: The ability of a company to compete in mature markets as well as new ones, thriving in both efficient, highly controlled environment as well as those where agility and experimentation are a must.

Outside Directors: A director who is not an executive of the company. Although an outside director is more independent, they may be less informed about the company, creating an information gap and thus impacting decision making.

Passive Investors: An investor who does not participate in the decisions of running a company but relies on the management and stakeholders of the company to maximize its shareholder value.

Pay for Performance: The relationship between executive compensation and corporate performance over a specified measurement period.

Peer Group: A group of companies that are similar in industry, size, and/or geography often utilized for benchmarking executive compensation size and structure as well as financial and operating performance.

Performance Units (Shares): Allocation of company shares to executives granted only after certain company-wide performance criteria are met such as earnings per share targets, intending to motivate management to focus on activities that drive shareholder value.

Performance-vested Options: Options that vest based on the accomplishment of a defined target rather than time. Accelerated vesting based on performance can include the achievement of an accounting-based performance result such as earnings per share, a major strategic goal such as the launching of a new product or a total stock price target.

Perquisites: Perks and amenities provided by the company such as free use of company airplane or paid membership in a certain club.

Pledging: The use of stock in a company as collateral for a loan that is used for investment and/or spending purposes.

Plurality Voting: A system for proxy voting under which the director who receives the most votes win.

Poison Pill: A defense used by a target company to prevent hostile takeover attempts by 1) allowing existing shareholders the right to purchase additional shares at a discount and thus diluting the ownership interest of a new hostile party or 2) allowing shareholders to purchase the shares of the new hostile party at a deeply discounted price if the hostile takeover attempt is successful. General American Oil first used this defense in 1982 to prevent a hostile takeover by T. Boone Pickens. The Delaware Supreme Court in the United States ruled the defense legal in 1985.

Prediction (or Betting) Market: An open market where people can speculate on future events or the outcome of a future decision.

Preferred Stock: A class of stock that has seniority to common stock and may have priority over common stock upon liquidation and in the payment of dividends.

Premium Options: Stock options with an exercise price that is higher than the market price on the date of the grant.

Prepaid-Variable Forward (PVF): A contract utilized to hedge the value of a common stock by promising future delivery of shares in return for an upfront payment of cash, allowing a large shareholder to postpone taxes due on capital gains because the sale is not finalized (until typically two to five years later) and at the same time providing the shareholder with downside and partial upside protection because the number of shares owed is generally based on a sliding scale.

Principles-Based Accounting Standards: A system of accounting under which general accounting concepts are outlined, giving more flexibility to a company as the company could adjust accounting principles to a company’s transactions. The International Financial Reporting Standards (IFRS) is an example of a Principles-Based Accounting.

Professional Director: An individual who serves on boards of directors on a full time basis. They bring expertise, board experience and extensive networks.

Proof Of Stake: A certain class of blockchain focused consensus algorithms in which the creator of a block is chosen randomly based on the amount of tokens they have.

Proof Of Work: A certain class of blockchain focused consensus algorithm in which one can be the first one to create a block after solving a complex mathematical puzzle.

Proxy Access: The practice of allowing shareholders to directly nominate board candidates through the company proxy.

Proxy Advisory Firms: Third party firms that evaluate proposals on the annual proxy from management and shareholders and recommend how investors should vote.

Proxy Contest: An act by shareholders joining forces to vote out a number of management or directors so it would be easier for a third party acquirer to seize control over the company. The third party acquirer would contact shareholders through a third party proxy solicitor, stating their case and thus influencing their voting positions.

Public Crowdsale: Openly marketing and selling to members of the public subject to legal and regulatory constraints.

Public Pension Funds: Pension funds that manage retirement assets on behalf of state, country and municipal governments. Union based pension plans typically base payments on years of union membership and time spent with multiple employers.

Pyramidal Business Groups: Two or more listed companies under a common controlling shareholder that holds at least ten (10) percent in each.

Quorum: Minimum number of votes that need to be casted for a proposition to be studied. For instance, if a certain number of votes is not reached, the proposition would be discarded and its vote results would be ignored.

Quadratic Voting: A voting system where voters can attribute more power to their votes; however, doing so requires even more voting power of which the cost increases quadratically. For instance, if one has 100$ of voting power and one vote costs 1$ — If they wanted to vote only once, they would pay only 1$. However, if they wanted to add another vote, they’d have to pay 4$ for the vote, then 9$, 16$ etc… This is used to incentivize people to vote diversely for different proposals. When used with a Token Weighted Vote system, this could also help mitigate the challenge of heavy voting influence by big token holders.

Ratcheting Effect: A Keynesian theory that states that once prices have risen according to a rise in aggregate demand, they do not always reverse when that demand falls. In governance, the term refers to an effect in which the medium of executive compensation increases as multiple companies within a group increase compensation to match their peers or exceed the medium compensation.

Rational Self Interest: A theory that most people will act in an economically rational way when they are faced with decisions affecting their own income and well-being while avoiding situations that would harm their economic condition and/or not provide the best value for their time, efforts and/or money.

Realized Pay: The total value of compensation that an executive converts into cash, losing its future incentive value. For example, stocks are realized when they are exercised and sold for cash.

Regulation D: In the United States under the Securities Act of 1933, any offer to sell securities must be registered with the SEC unless it falls under certain exemptions. Regulation D enables certain companies to offer and sell their securities without registration. However, a Form D must be filed. See the three exemptions under Regulation D.

Regulation A+: In the United States under the Securities Act of 1933, any offer to sell securities must be registered with the SEC unless it falls under certain exemptions. Regulation A+ allows the issuer to provide security approved by the SEC to non-accredited investors with a general solicitation for maximum $50M in investment. See exemption under Regulation A+.

Regulation S: The “safe harbor” exemption applies when an offering of securities is executed outside of the United States and is not subject to the registration requirement under Section 5 of the 1933 Act. See safe harbor provisions under Regulation S.

Representative (or Indirect) Democracy: A form of democracy where the participants choose some representatives to represent themselves to make decisions.

Repricing: A transaction in which employees are allowed to exchange stock options for new options, restricted stock or cash.

Reputation: The beliefs or opinions that are generally held about someone or something. In terms of decentralized governance this can also be tokenized and used to perform votes.

Reputational Risk: The degree to which a company protects the value of its intangible assets such as reputation by investing in brand development, monitoring the use of its brands, managing customer and vendor experiences, reaching out to its community and developing good relationships with its stakeholders.

Reserve Pool: Distribution of tokens for future allocations.

Resilience: The degree to which an organization can recover from the consequences of a disruption.

Restricted Stock: Grant of shares that have transferability restrictions and are subject to a vesting schedule based on time.

Retention Approaches: A provision in contract that requires an executive to take a percentage of cash realized through option exercises invested in company stock.

Risk: The likelihood of loss from outcomes outside of one’s expectation and control.

Risk Culture: A practice within a company that considers risk as part of normal decision making.

Risk Management: The process by which a company manages its risk exposure.

Risk Tolerance: The degree to which a company is comfortable pursuing a strategy with highly uncertain outcomes.

Rules-Based Accounting Standards: A system of accounting under which specific rules determine how accounting standards should be applied to business activities. US GAAP is a rules-based system.

Sarbanes-Oxley Act of 2002 (SOX): Legislation passsed by US Congress to help protect investors from fraudulent financial reporting as a response to scandals pertaining to Enron and other corporations. Sarbanes-Oxley is one of the most important legislation on governance in the United States. Executives are required to personally certify in writing that the company’s financial statements comply with SEC disclosure requirements with misrepresentations subject to criminal penalties. Auditors and management are required to implement internal controls. The audit committee is required to be independent, and the law restricts auditing companies from providing non audit services for the same clients. Sarbanes-Oxley also banned most personal loans to directors or executives.

Say-on-Pay: The practice of giving shareholders a vote to approve the compensation programs of an executive and/or director. In the United States and United Kingdom, say-on-pay vote are nonbinding whereas in Switzerland, they are binding.

SEC Rule Rule 10b5–1 Plan: Under Rule10b5–1, insiders are permitted to enter into a binding contract outside the blackout period that instructs a third party broker to execute purchase or sales transactions on behalf of the insider if certain specified conditions are met. Conditons may include number of shares, share price limit or the interval between transactions.

Section 14A of the Security Exchange Act: Section 951 of the Dodd-Frank was implemented by the SEC as Section 14A of the Security Exchange Act on April 4, 2011, requiring public companies to provide their shareholders with an advisory vote on executive compensation (say-on-pay votes), desired frequency of say-on-pay votes and “golden parachute” arrangements.

Securities and Exchange Commission (SEC): A regulatory body in the United States that oversee financial markets, protecting the rights of shareholders and preventing fraud. SEC has the authority to regulate securities exchanges, bring civil enforcement actions against companies or executives who violate securities laws, maintain the standards of accounting standards and financial reporting and overseeing the proxy solicitation and annual voting process.

Security: The process in which a company uses to protect its assets from vulnerabilities, threats or danger.

Security Token: The tokenized equivalent of a traditional financial asset. For instance, a currency or the share of a company.

Security Token Exchanges: An exchange that trades security tokens.

Security Token Offering: Type of public offering in which tokenized digital securities are sold in security token exchanges.

Security Token Right — Dividends: Security tokens that provide the token holder with dividends.

Security Token Right — Equitable Interest: Security tokens that provide the token holder equitable interest in the company.

Security Token Right — Equity Ownership: Security tokens that provide the token holder equity ownership in the company.

Security Token Right — Profit Sharing: Security tokens that offer a share of the profit of the company.

Security Token Right — Redemption: Security tokens that provide the token holder an option to redeem their token in exchange for cash proceeds.

Security Token Right — Voting Rights: Security tokens that provide the token holder a right to vote in the company affairs.

Security Tokenization: Security token where value is based on the success of the underlying asset such as funds and ETFs.

Self Interest: The theory behind the need for corporate governance that assumes that self-interested executives would take actions that benefit themselves at the cost of shareholders and stakeholders of the company.

Serviceable Available Market (SAM): The total value of every customer the company can reach.

Serviceable Obtainable Market (SOM): The total value of every customers the company can reach with competitors and constraints.

Severance Agreement: Also known as Golden Parachute, a provision in an employment agreement which entitles an executive to additional compensation upon resignation or termination, typically offering a lum-sum cash payment equal to three times the current annual salary and the immediate vesting of all unvested equity grants.

Shareholder Democracy: A movement that wants greater influence for shareholders over corporate governance matters. Majority voting in uncontested director elections, restricted discretion over broker nonvotes, say-on-pay, proxy access and a reduction of antitakeover protections fall under this movement.

Shareholder-Centric Perspective: A perspective that the primary obligation of the company is to maximize shareholder value. Companies would improve labor conditions, reduce environmental impact and treating vendors fairly only to the extent that such activities improve the financial performance of the company.

Shareholder-Sponsored Proposal: A proposal placed before the shareholders for a vote on the annual proxy that is sponsored by one or a group of shareholders. In the United States, Rule14a-8 sets forth rules under which a company may exclude such proposal.

Simple Agreement for Future Tokens and Equity (SAFT-E): An agreement that offers investors tokens or equity in the future, whichever happens first.

Smart Contract: A program that executes autonomously on a Blockchain. It can be used to implement various applications or protocols.

Smart Contract Audits: A process a company undertake to assure security in a smart contract whereby code is investigated to find security flaws and vulnerabilities before the code is open to the public.

Social Responsibility Investment Funds: Mutual funds directed to investors who value social objectives and invested only in such companies. Mutual funds that advocate for environmental sustainability or fair labor practices are examples.

Spring-loading: The practice of awarding stock options immediately before the release of positive news that is likely to drive up the price of a stock.

Stablecoin: A cryptocurrency pegged by an asset or a physical commodity of value.

Staking: Accumulating stake for a given purpose. Also used on blockchain networks to grant specific abilities, for instance the ability to vote or produce blocks.

Stakeholders: A stakeholder-centric perspective that a company’s obligations to stakeholders and constituents are as important as shareholder’s value.

Staggered Board: Also called a Classified Board, a board structure in which directors are elected to multiple-year terms with only a subset of directors standing for reelection each year. Staggered boards may be effective antitakeover defenses if they are part of the entity charter.

Stock Options: A contract that grants the recipient the right to buy shares in the future at a fixed exercise price, typically the stock price on the grant date. Stock options typically have vesting requirements and expire seven (7) to ten (10) years.

Stock Ownership Guidelines: Guidelines that specify the minimum amount of stock that an executive is required to hold during employment.

Stock-option Backdating: The practice of modifying the grant dates of stock options retroactively to match a low in the company’s share price. This practice violates GAAP accounting, SEC reporting and IRS rules.

Succession Planning: The process by which a Board plans for, identifies and selects a new CEO. The Board may select an external candidate, promote and groom an executive to replace the CEO, allow two internal executives to compete for the CEO position or select the most qualified candidate from the total labor market with consideration of the internal candidates.

Summary Compensation Table: A table showing an overview of a company’s total compensation to the CEO, CFO, and three other most highly compensated executive officers for the past three fiscal year. This disclosure includes, without limitation, stock option grants, stock appreciation rights, pension plans and employment contracts.

System of Corporate Governance: A corporate governance system is a set of processes and procedures that a company adopts to prevent self interested individuals from engaging in activities that hurt the company’s shareholders and stakeholders. A board of directors, an external auditor, as well as other constituents (owners, creditors, customers, vendors, media, regulators, investors et el) may be a part of the governance system.

Tag-Along Rights: Contractual obligations that protect a minority investor, entitling a minority investor the same price and rights as the majority investor when shares are sold.

Tender Offer: A public offer to acquire the shares of a company at a stated price. Typically tender offers are made at a specified price over the market practice to induce a large number of shareholders to sell their shares as a takeover attempt.

Tenured Voting: An individual accumulates votes according to the length of time the individual holds a stock.

Terms of Reference: Terms used for committees with a specific task instead of a formal constitution.

The Cadbury Committee (1992): Intended “to help raise the standards of corporate governance and the level of confidence in financial reporting and auditing,” the committee and its final report provided best practices pertaining to governance including the following:
- Separation of the Chairman and CEO titles
- Appointment of independent directors to the Board
- Reduction of conflict of interest
- Creation of an independent audit committee
-Evaluation of the company’s internal controls effectiveness
Such recommendations set the foundations of the London Stock Exchange and have influenced governance standards in the US and elsewhere.

The Greenbury Report (1995): The committee reviewed executive compensation in the United Kingdom and recommended an independent compensation comittee comprising only of independent directors. Best practices included the following:
- Compensation should be sufficient to attract, retain and motivate directors but no more than necessary for such purpose
- Rewards are linked to corporate and individual perfomance
- Formal and transparent procedure for developing policy on executive compensation
- No director should decide his or her own compensation

The Hampel Report (1998): The committee reviewed the effectiveness of the Cadbury and Greenbury reports to determine whether changes needed to be made pertaining to corporate governance in the United Kingdom. The committee determined that no changes were necessary and thereafter consolidated both sets of recommendations into the “Combined Code of Best Practices” which was adopted by the London Stock Exchange.

The Higgs Report (2003): Sir Derek Higgs produced this report when he was asked to evaluate the role, quality and effectiveness of nonexecutive directors in British companies. His recommendations include the following:
- At last 50% of the Board should be nonexecutive directors
- Appointment of lead independent director to serve as liaison with shareholders
- A nonexecutive committee to head the nomination committee
- Executive directors should not serve more than six (6) years on a Board
- Board should be evaluated
The recommendations from the Higgs Report is combined with the Turnbull Report and the Combined Code to create the Revised Code of Best Practices. His final guidance is published in March of 2011.

The Turnbull Report (1999): The report Internal Control: Guidance for Directors on the Combined Code was chaired by Nigel Turnbull of the Rank Group plc. Recommendations in the report included keeping good internal controls and performing audits to ensure financial reporting accuracy and fraud deterrance.

Tin Parachute: A severance agreement that allows every employee who is terminated because of a change in control to receive both cash compensation and immediate vesting of all unvested stock options and restricted shares.

Token: A unit of value issued by a given organization and intended to be a part of their ecosystem or project. Usually issued on a Blockchain, tokens can be used to represent votes or shares in a company.

Token Curated Registry: A specific list of entries which are curated by following a Token Weighted Vote system, one of the simplest example of governance!

Token Holder: Somebody having (and keeping) a set of tokens.

Token Weighted Vote: A particular vote in which votes are denominated based on the number of tokens one is using to back a proposal, usually this means that one token is equal to one vote.

Tokenization: The process of issuing a token on a Blockchain to represent one or many real tradable assets. Many things can be tokenized such as art, IP, shares of a company, real world goods, houses, even consultancy time with precise people, among others.

Tokenized Incentives: The use of game theory to incentivize good behaviors among debt participants such as reward for timely repayments and payment for dispute arbiters.

Total Addressable Market (TAM): The total value of very conceivable customer.

Total Shareholder Return (TSR): The total return of a stock to an investor over a defined period of time.

Tournament Theory: A theory created by Professors Edward Lazear and Sherwin Rosen in 1981 that justified the internal compensation difference between the CEO and the executives below the CEO. The professors argued that the compensation differential serves as an incentive for executives to compete for promotion.

Tranche of Options: Pieces of a pooled options that are split up by degrees of risk as well as different maturities, yields and repayment privileges so they are marketable to various investors.

Transparency: The degree to which a company provides details that explain events reported in its financial statements and other public filings. Transparency allows an individual to understand a company’s strategy, operations, risk and performance.

Trust: Confidence in the integrity of an entity.

Ultra Vires: Any acts that are outside the scope of the authority of the company. It is a Latin term which means “beyond the power.” Any acts that constitute an excessive use of power may incur liability to the company since they generally cannot be legally defended in court.

Uncontested Election: An election in which the number of candidates is the same as the number of slots available for election, guaranteeing the election of the candidate. Most corporate elections are uncontested.

Universal Basic Income: In theory, a public program of payment distribution to all citizens without any work-related conditions.

Utility (or Platform) Token: A token that was designed for use on a specific platform offering a specific good or service.

Voting Token: A token used to represent votes on a voting platform. Generally linked to Token Weighted Vote systems.

Wallet: A piece of software (or hardware) used to hold and transfer tokens.

Whale: Somebody with a lot of identical tokens in such proportions that they could be used to influence votes despite the will of the initial voters.

Wolf-Pack Strategy: A strategy where multiple hedge funds join forces to force change on a company.

Written Consent: A process in which a written resolution is circulated among board members for their signatures when the Board acts by written consent. When a majority of the directors have signed the document, then the action is complete.

Zero-Cost Collar: A strategy used to hedge against volatility in an stock price though the purchase of call and put options that place cap and floor on profits and losses for the derivative. Such strategy is intended to protect losses by purchasing call and put options that cancel each other out.

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