Models and practices of corporate governance (Conf. dr.

Voicu Dragomir)
Basic Glossary
Source: https://www.gsb.stanford.edu/faculty-research/centers-initiatives/cgri/research/glossary
 Models and practices of corporate governance (Conf. dr. Voicu Dragomir)
Capital markets (1)
Capital Market Efficiency
The degree to which markets set correct prices for labor, natural
resources, and capital, based on the information available to
both parties in a transaction. Accurate pricing is necessary for
firms and individuals to make rational decisions about allocating
capital to its most efficient uses. When capital markets are
inefficient, prices are subject to distortion and corporate
decision making suffers.
Financial Risk
The degree to which a company relies on external financing
(including capital markets and private lenders) to support its
ongoing operations. Financial risk is reflected in such factors as
balance sheet leverage, off-balance sheet vehicles, contractual
obligations, maturity, schedule of debt obligations, liquidity, and 2
other restrictions that reduce financial flexibility.
 Models and practices of corporate governance (Conf. dr. Voicu Dragomir)
Capital markets (2)
Insider Trading
The term “insider” identifies individuals—corporate officers,
directors, employees, and certain professional advisors—who
have access to material financial and operational information
about a company that has not yet been made public. Insiders
are restricted in their ability to engage in transactions involving
company securities and may trade only when they are not in
possession of material nonpublic information.
Active / Passive Investors
Some investors are active in the trading of company securities.
Active investors tend to care greatly about individual company
outcomes. As a result, they might try to influence corporate
activities to improve company performance. Passive investors 3
attempt to generate returns that mirror the returns of a
predetermined market index.
 Models and practices of corporate governance (Conf. dr. Voicu Dragomir)
Strategy (1)
Business Model
A model that links specific financial and nonfinancial measures
in a logical chain to delineate how a company’s strategy
translates into the accomplishment of stated financial goals. The
board evaluates the business model for logical consistency,
realism of targets, and statistical evidence that the relationships
between performance metrics and stated goals are valid.
Corporate strategy is the process by which a company expects to
create long-term value for shareholders and stakeholders. The
corporate strategy defines the businesses a company will
participate in and outlines how the company expects to create
value by participating in these businesses.

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 Models and practices of corporate governance (Conf. dr. Voicu Dragomir)
Strategy (2)
Corporate Reputation
Is constructed by investing in product brand development,
investing in corporate brand development, monitoring the use of
brands, monitoring supplier and customer business practices,
performing community outreach, and handling stakeholder
relations.
Risk
The likelihood and severity of loss from unexpected or
uncontrollable outcomes. This includes both the typical losses that
occur during the course of business and losses from extremely
unlikely and unpredictable events. Risk arises naturally, both from
the nature of the activities that a corporation participates in and
from the manner in which it pursues its objectives. Risk cannot be
separated from the strategy and operations of the firm but instead 5
is an integral feature of organizational decision making.
 Models and practices of corporate governance (Conf. dr. Voicu Dragomir)
Legal aspects
Compliance
How an organization ensures its activities conform with all
relevant mandatory and voluntary requirements. Successful
compliance management involves clearly defining applicable
laws, regulations, codes, best practices, and internal standards,
and so on. It must demonstrate how the organization ensures
that it is in strict adherence with all relevant requirements.

Bankruptcy
A situation in which a corporation becomes insolvent (i.e., the
value of its liabilities exceeds the value of its assets). In
bankruptcy, the legal obligation of the corporation is to preserve
and maximize the financial claims of creditors (rather than
shareholders). 6
 Models and practices of corporate governance (Conf. dr. Voicu Dragomir)
Accounting (1)
Key Performance Indicators (KPIs)
KPIs, or key performance measures, include both financial and
nonfinancial metrics that validly reflect the current and future
performance of a company. The board uses key performance
measures to evaluate management performance and award
compensation. Financial KPIs include measures such as total
return; revenue growth; earnings per share; earnings before
interest, taxes, depreciation, and amortization (EBITDA); return
on capital; economic value added (EVA); and free cash flow.
Nonfinancial KPIs include measures such as customer
satisfaction, employee satisfaction, defects and rework, on-time
delivery, worker safety, environmental safety, and research and
development (R&D) pipeline productivity.
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 Models and practices of corporate governance (Conf. dr. Voicu Dragomir)
Accounting (2)
Principles-based Accounting Standards
A system of accounting under which general accounting concepts are
outlined but the specific application of those concepts to various
business activities is not defined. International Financial Reporting
Standards (IFRS) used in Europe and many Asian countries is
considered a principles-based system. A principles-based system
allows for more discretion than a rules-based system.

Earnings Management
Altering or manipulating financial results to meet or exceed
quarterly forecasts. Earnings management may or may not be
fraudulent, depending on the tactic employed. Still, manipulated
earnings tend to be a signal of governance problems. 8
 Models and practices of corporate governance (Conf. dr. Voicu Dragomir)
Public relations
Stakeholders
Stakeholders believe that corporations or organizations have a
societal obligation beyond increasing shareholder value and that
obligations to constituents such as employees, suppliers,
customers, and local communities should be held in equal
importance to shareholder returns (e.g., environmental
sustainability, corporate social responsibility).
Transparency
The degree to which a company provides details that
supplement and explain accounts, items, and events reported in
its financial statements and other public filings. Transparency is
important for shareholders to properly understand a company’s
strategy, operations, risk, and performance of management. It is
also necessary when shareholders make decisions about the 9
value of company securities.