Glossary of terms

The Institute of Directors in New Zealand has produced a glossary of useful governance terms.

Advisory board
A committee of persons selected by a board to provide defined advice and information to the board and management. Advisory board members are not directors, have no powers and owe no duties as directors of the company. The key differentiator is that an advisory board advises only and has no power of decision making.

Audit committee
An audit committee is a committee of the board whose principal function is to assist the board in producing accurate financial statements in compliance with all applicable legal requirements and accounting standards. Risk management can also be a major focus.

Board of directors
Section 128(1) of the Companies Act provides that "The business and affairs of a company must be managed by, or under the direction of or supervision of, the board of the company". A board is composed of directors elected by shareholders.

Chair
Except for requirements (subject to the company's constitution) in the Companies Act to chair meetings of shareholders and directors, the role of the chair is not prescribed by legislation. The chair is the director elected by the board of directors to chair meetings of the board and to sign the minutes. They also usually chair shareholder meetings. A wealth of best practice however exists for this important role relating to communication. board and company culture and shareholder/stakeholder relations.

Company secretary
With the passage of the Companies Act a company is no longer required to have a company secretary. Larger companies may choose to retain the role. The company secretary (or equivalent officer) serves the board in an administrative capacity, being responsible for board papers and their receipt by all board members, assisting with the minutes, agenda construction and board processes and procedures.

Governance
The latin verb gubernare (to steer) and noun gubernator (helmsman of a ship) are early etymological references. They convey the essential qualities recognised in modern governance of how an entity is directed and steered.

The word governance comes from the old French word 'gouvernance' and means control and the state of being governed. According to the Oxford English Dictionary, it also means good order. Thus we have the etymology of the word a useful metaphor - the idea of steering or captaining a ship. We have references to control and also to good order, which is more than simply being on course: it is also being shipshape and in good condition.

Executive/non-executive director
A director of a company who holds an executive position within that company. Executive directors tend to be fulltime employees of the company who also assume the full range of a director's responsibilities and duties. Executive directors can provide great depth of company knowledge for a board's deliberations. A non-executive director holds no such company position.

Note that a non-executive director is not necessarily an independent director but that an executive director cannot be an independent director. See also Independent director.

Independent director
Independent means independent of management and free from any business or other relationship or circumstance that could materially interfere with the exercise of a director’s independent judgement. For example, a director would not be independent if they had recently been employed by the company or have a contractual relationship with the company (other than as a director) or if they are related to a major shareholder.

In terms of the NZX listing rules an independent director is a director who is not an executive of the company and who has no disqualifying relationship. A disqualifying relationship means any direct or indirect interest or relationship that could reasonably influence, in a material way, the director’s decisions in relation to the company. For example, a director would be deemed to have a disqualifying relationship if they had a substantial security holding or if the director is likely to derive, in the current financial year of the company, a substantial portion of his, her or its annual revenue during such financial year. NZX considers a substantial portion to be generally 10% of a director’s annual revenue.

Note that a non-executive director is not necessarily an independent director but that all independent directors are non-executive directors.

Insider trading
A person, described as an information insider can now fall under the insider trading prohibition. Criminal penalties have been introduced alongside civil remedies. An information insider is anyone who has material information that is not generally available in the market and who knows, or ought reasonably to know, that the information is material and not generally available. Prohibitions exist for information advisers of a public issuer against their trading or advising or encouraging others to trade or disclosing information to others likely to trade in securities of that public issuer. In the normal course of events directors of public Issuers will almost invariably be information insiders.

Nomination committee
A committee of the board charged with planning board composition, developing director specifications, searching for, screening and selecting candidates and making recommendations to the full board for a final decision.

Being a smaller group the nomination committee can go into greater detail, more expeditiously, than the full board and is not subject to the time constraints of full board meetings.

A nomination committee works within and subject to the framework of the Companies Act, the company's constitution and (where relevant) the NZX listing rules wherein are prescribed rules and formalities for the appointment of new directors.

Proxy season (US)
Most US companies hold annual meetings in the northern spring - proxy season - with a smaller number in the northern autumn - a smaller proxy season. Under SEC regulation, companies must disclose all relevant material to do with vote solicitations for annual meetings for both company and shareholder generated resolutions. Ballot papers, resolutions and relevant material and proxy forms accompany the annual report and other materials sent out to shareholders prior to the annual meetings. Before this mail out shareholders can propose resolutions (non-binding) for consideration at the annual meeting and these must form part of the papers, subject to a detailed process and rule set which does allow for corporate refusal.

Remuneration committee
A committee of the board which recommends to the board:

  • the remuneration arrangements (including entitlements under incentive plans, company share and option schemes and other benefits) for the CEO, executive directors and other senior executives, and relative employment contracts
  • the remuneration policies and practices for the company generally
  • any company share or option or other incentive schemes
  • the company's superannuation and/or pension arrangements
  • the remuneration arrangements for the non-executive members of the board.