Proxy Guide: Glossary

by March 25, 2013

For the definition of even more financial terms, try:

10b5–1 plan — A stock trading plan established by an executive or director in advance, allowing automatic purchases or sales of company stock to continue without regard to developments that would normally prohibit discretionary trading.

balance sheet — A snapshot in time of a company’s financial position: the assets it owns, the liabilities it owes. Typically presented as of the last day of a quarter or year.

beneficial owner — For all practical purposes, the holder or owner of shares in a company. Various circumstances can make an individual or company the beneficial owner of shares that they do not technically own under the law, such as under various trust arrangements, or when a parent controls shares owned by a minor child.

cash-flow statement — Another piece of a company’s financial statement that attempts to show the flow of cash through the business.

CD&A — Compensation Discussion & Analysis. Sometimes mis-heard as CDNA. The section of an annual proxy statement in which the company explains how and why it decided to pay its top executives what it did.

Central Index Key (CIK) — A unique number assigned by the SEC to each company filing documents with the agency.

change of control — Various scenarios under which the control of a company changes hands, including by sale, merger, hostile takeover, proxy battle or other circumstances in which members of the existing board of directors no longer hold a majority of the board’s seats, or existing shareholders no longer hold a majority of shares oustanding. However, for a variety of purposes — e.g., executive severance agreements — different definitions may apply (including turnover of less than a majority of directors or shares).

closely held — A company whose shares are held by one or a small group of shareholders. Such shares are typically not traded on a public exchange.

current report — Formal name for a filing on Form 8-K.

deferred compensation — Pay that an executive chooses not to receive immediately, typically under a formal company program benefiting highly paid employees or specific top executives. Conceptually, deferred-comp accounts are like souped-up 401(k) plans: Executives postpone receiving pay and receive investment returns on the amount deferred. In fact, the money is rarely actually invested; companies simply pay the benefit from operating cash-flow when it comes due.  The accounts function as enormous IOUs from the company to the executive, even when the growth of the account is determined as if it were invested in various financial instruments. These plans are almost always non-qualified. — See also: non-qualifiedDEF 14A — Definitive proxy statement. — See also: PRE 14A, merger proxy

director — Member of a company’s board of directors, who oversees the management team that runs the company day-to-day. — See also: non-employee director, independent director

earnings — Net income, or profit. — See also: earnings per share

earnings per share — Broadly, net income divided by shares outstanding. Used as a way to gauge a company’s financial performance.

EBITDA— Earnings Before Interest, Taxes, Depreciation and Amortization. Often used as a rough estimate for cash-flow. EBIT is Earnings Before Interest and Taxes, making it roughly analgous with operating income.

EBITDA financial glossary

The financial has a language all its own. You may not learn it all, but journalists should become familiar with the terms.

Edgar — The SEC’s Electronic Data Gathering, Analysis, and Retrieval system, a massive database of corporate filings, the earliest of which date back to the mid-1990s. Access it here, and use the full-text search (past four years only). See other search options here.

equity — Broadly, ownership, usually partial ownership (holding equity in a company or partnership). Most often used to refer to the shares of publicly traded companies, as in stock-based pay (equity compensation) or stock investments generally (equities).

expense — A cost of doing business. Can include tangible costs (raw materials, salaries) as well as intangible ones (depreciation, amortization).

financial statements — A company’s balance sheet, income statement, cash-flow statement, and statement of shareholders’ equity, along with accompanying (and usually extensive) footnotes.

Form 10-K — Annual report as filed with the SEC, including financial statements, footnotes and other material. Generally audited by a third-party auditing company.

Form 10-Q — Quarterly report as filed with the SEC, including financial statements, footnotes and other material. Generally not audited, in contrast with a 10-K.

Form 3 — Initial filing by a company officer, director or major shareholder (owner of 10 percent or more of the company’s shares), showing how much company stock is owned. Must be filed within 10 days of becoming an officer, director or major shareholder.

Form 4 — SEC filing made by officers, directors and major shareholders (10 percent or greater) of a company to disclose the acquisition or sale of company stock or related securities. Most transactions must be reported within two business days.

Form 5 — A catch-all filing for officers, directors or major shareholders (10 percent or greater) to report previously unreported stock transactions.

Form 8-K — Report of a current event. This is a catch-all filing for companies to use when disclosing a variety of specific events (departure or appointment of directors and officers, bylaws change, etc.) or more general ones that the company chooses to make public or believes it is required to disclose. Press releases often are filed with 8-Ks, but the filing or its exhibits may contain substantial information that isn’t in the press release.

golden parachute — Severance-pay package awarded by a company to an executive after the company is acquired or taken private.

hypothetical shares — See also: phantom shares.

in the money — Of options and related instruments: Positive in value, and therefore worth exercising. — See also; stock options

income statement — A summary of a company’s financial activity over the course of a particular period, such as a quarter or year. Unlike a balance sheet, the income statement doesn’t present a moment in time, but an overview of a period of time. Unlike a cash-flow statement, the income statement is intended to show any economic activity, even where cash hasn’t changed hands (e.g., a sale for which payment has not yet been received). Major line items include revenues, expense and net income.

Dictionary page Moneyindependent director — A director who meets specific independence standards, primarily those set by the New York Stock Exchange, the Financial Industries Regulatory Authority, and similar organizations. Typically excludes recently retired or departed executives, family members of current executives, major stockholders, and individuals who do substantial business with the company on whose board they sit. However, it doesn’t preclude all outside relationships with a company or its management.

insider trading — Technically, any purchase or sale of a company’s stock by an executive, director or major shareholder, but most commonly used to refer to illegal transactions, e.g, ones made with knowledge of material, non-public information that could affect the share price. — See also: insider transaction

insider transaction — A term generally used for legal insider trading. These transactions generally must be disclosed by filing a Form 4 or Form 5.

internal controls — Safeguards that companies are supposed to have in place to ensure that their financial statements and other disclosures accurately reflect the company’s operations and condition. Failures in internal controls and reporting can lead to restatements, as well as lawsuits, stock-price declines and bad publicity.

issuer — A company that has sold stock to the public; generally used in securities regulations and related material.

LTIP — Long-term incentive plan. Generic name for a kind of executive pay plan that determines payouts based on multiple years of company or individual performance, and sometimes also pays those awards out over multiple years.

M&A — Shorthand for mergers and acquisitions; corporate deal-making, or the buying or selling of companies.

material — Significant. Investors usually consider information “material” if it could affect the stock price substantially once it is generally known. But materiality isn’t always well defined, and there can be considerable gray area.

MD&A — Management Discussion & Analysis. Significant section of a 10-K (annual report) filing in which management provides detail and insight into the company’s results, challenges, opportunities and operations. Sometimes mis-heard as MDNA

merger proxy
— A proxy statement issued in advance of a special meeting of shareholders held to decide whether a company will be acquired.

named executive officers — Generally, a company’s chief executive officer, chief financial officer, and the three highest-paid officers other than those two. (But actual titles can vary. Technically, the first two slots are filled by the “principal executive officer,” which at most companies is the CEO or an executive chairman, and the “principal financial officer,” which is usually the CFO.)

NEO — Named Executive Officer.

net income — Broadly, profits or earnings. What’s left over after corporate expenses (including things such as raw materials, depreciation and taxes) are deducted from revenues. — See also: profit

non-employee director — Any director not actually employed by the company on whose board he or she sits at a given time. This can include former executives, relatives of current directors and others who don’t meet independence tests. — See also: independent director, directorDictionary commerce

non-qualified plan — A benefit plan that isn’t qualified under federal tax law, meaning that it doesn’t benefit from the same tax exclusions as a 401(k), traditional pension, or similar plans. As a result, to avoid tax costs, companies typically set up non-qualified benefits as hypothetical accounts. Instead of actually setting money aside (e.g., for a deferred compensation plan or SERP), they simply keep a paper record of what the account should be. This usually makes no practical difference for an executive. However, if the company becomes insolvent, these IOUs are unsecured debt, meaning the executive must wait in line with other creditors in the bankruptcy process. (By contrast, 401(k) and pension accounts have dedicated assets that may not be used for other purposes, even in bankruptcy.)

operating income — Roughly, revenues minus the costs of actually operating a business — wages, raw materials, etc. — before taking into account non-operating expenses such as  interest on company debt and taxes. — See also: EBITDA, net income

performance shares — Typically, restricted stock that vests only after certain performance hurdles are met. Those hurdles can include stock-price targets or other company results, such as net income, revenues, etc.

perk — Perquisite, or a company-paid benefit or privilege, such as a company car, free financial advice, personal jet travel, etc.

phantom shares — Similar to restricted stock units, in that no actual shares are issued when the award is made. Often, phantom shares are settled in cash, or may be settled in cash or stock, at the option of either the executive or the company.

poison pill — A feature designed to make it harder for an outsider to take control of a company against its board’s wishes (e.g., by buying up a lot of stock). They typically inflate the number of shares held by existing shareholders if an investor buys significant amounts of stock without the board’s support.

PRE 14A — Preliminary proxy statement, issued in advance of the definitive proxy statement (DEF 14A) to receive feedback from SEC staff.

present value — The value today of a stream of payments in the future. If pension promises a 50-year-old executive $1 million a year for 10 years starting at age 65, it has some value today, although that value is less than $10 million. A present-value calculation determines that figure by making assumptions about interest rates, inflation and other factors.

principal officers — Typically, the chief executive officer (CEO), chief financial officer (CFO), president and chief accounting officer (CAO), but different companies may use different titles. The term overlaps with, but isn’t necessarily the same as, the proxy’s Named Executive Officers.

profit — Earnings.

proxy battle — Most commonly an effort by a hedge fund or other major investor to elect individuals to a corporate board over the objections of the current board.

proxy statement — A filing made to solicit votes from shareholders, most commonly by a publicly traded company ahead of its annual meeting. However, other kinds of proxies also exist. — See also: merger proxy, proxy battle

qualified plan — An employee benefit plan that is eligible to receive federal tax breaks, generally because the plan benefits a broad cross-section of workers,rather than just top executives and other highly paid employees. — See also: non-qualified plan

record date — The cut-off date for voting at an annual meeting. Those holding shares on the record date may vote.

registrant — Typically, the company making a filing with the SEC (e.g., a proxy or 10-K filing). More technically, the entity whose shares are registered for sale to the public, thus triggering SEC reporting and other obligations. — See also: issuer

related-party transactions — Any of a number of specific or general relationships among a company, its directors and its executives. These can include family relationships (e.g., a CEO’s son-in-law working for a subsidiary of a company), business relationships (a director whose law firm does legal work for the company), and other contractual relationships (a company that leases a CEO’s personal jet for business purposes).

repricing — Of a stock option or related instruments, a reset of the strike price, usually to a lower number, converting an underwater instrument to one that is in the money. Typically frowned upon by investors and corporate governance experts, and rare now because doing so has adverse accounting implications for companies. — See also: in the money, underwater, strike price

restatement — Reissuance of a company’s prior financial statements because of serious errors in the originals.

restricted stock — Shares of stock that have certain restrictions attached to them, typically a prohibition on selling or transferring them before a certain date.

revenue — Generally, sales. Payment received (or expected) for goods or services provided.

risk factor — A disclosure by a company, generally in a 10-K or 10-Q, that warns investors of potential risks to a company’s business or stock. Officially, these are supposed to be specific and non-routine risks, but many companies try to include every imaginable eventuality.

RSUs — Restricted stock units. Similar to restricted shares, except each unit represents the right to receive one share at a future date, rather than actually constituting a share in and of itself.

SARs — Stock Appreciation Rights. The right to receive the difference between a company’s share price on two dates — usually the date of issue and some date one or more years in the future. May be payable in cash or stock, depending on the award’s terms. Similar to a stock option. — See also: stock options

Say on Pay — An up-or-down vote on executive pay that most companies are required to put before shareholders on a regular basis. Failing a Say on Pay vote, or even coming close to failing one, is akin to a vote of no confidence by shareholders.

SC 13D — A Schedule 13 filing.

SC 13G — A Schedule 13 filing.

Schedule 13 filing — Report disclosing ownership of 5 percent or more of a company’s shares. Must be filed within 10 days of crossing the 5 percent threshold, and is amended periodically as the shareholder’s stake rises or falls significantly. Schedule 13D filings can indicate an activist shareholder intending to take action to influence management or the company’s direction; Schedule 13G filings tend to be less dramatic.

SCT — Summary Compensation Table.

SERP — Supplemental executive retirement plan. — See also: non-qualified plan

shareholders’ equity — Essentially, what would remain of the company if all assets were liquidated and all liabilities paid off — what the shareholders ultimately own.

shares outstanding — The total number of shares issued.

stock options — Any of several financial instruments, used to compensate executives and other employees, that are ultimately valuable to the recipient only if the company’s share price rises. Most commonly, stock options are awarded with a strike price (typically the stock price at the time of award), a vesting period (typically one to three years), and a term (most often 10 years). Once an option has vested, the recpient may exercise it, which involves paying the strike price and receiving in return the share price at the time of exercise; the result is that the option recipient receives the difference between the two amounts. So if options on 100 shares are awarded to an executive when the underlying stock’s price is $8 a share, and the executive subsequently exercises the options when the stock price is $10 a share, he would receive ($2 x 100 =) $200. Once an option expires, it cannot be exercised and is worthless. (Note that stock options awarded to employees and executives are similar to, but distinct from, the kind of equity options that are traded in markets such as the Chicago Board Options Exchange, or CBOE.) — See also: vesting

strike price — The price at which as stock option or similar instrument is in the money, or worth exercising; typically the price of the underlying stock at the time the option was issued.

Summary Compensation Table — Primary pay disclosure in a proxy filing, covering the named executive officers and including columns for salary, bonus, stock options, stock compensation, non-equity incentive pay, pension and deferred-compensation gains, and other compensation (including perks and benefits).

tax gross-up — An additional payment meant to compensate the recipient for taxes paid on an initial payment or benefit (as well as the additional taxes owed for receiving the gross-up).

underwater — Of options and related instruments: Negative in value — i.e., the stock price has fallen below the strike price — and therefore not worth exercising. Recipients can wait for the underlying stock to rise again until the options are in the money, unless the options expire first, in which case they become worthless. — See also: stock options

vest — Full rights pass to the recipient. Usually used in reference to stock options, restricted stock, RSUs and similar instruments. While such an award is “unvested,” the recipient can’t cash it in or sell it; once it vests, all restrictions generally lapse.