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The history of corporate governance is long, rich and packed with twists and turns. It’s a topic that touches on managerial accountability, board structure and shareholder rights — including both periods of shareholder passivity and shareholder power. Governance began with the rise of corporations, dating back to the East India Company, the Hudson’s Bay Company, the Levant Company and other major chartered companies during the 16th and 17th centuries.
While the concept of corporate governance has existed for centuries, the name didn’t come into vogue until the 1970s. The United States was the only country using the term at the time. The balance of power and decision-making between board directors, executives and shareholders has been evolving for centuries. The issue has been a hot topic among academic experts, regulators, executives, and investors, making corporate governance history critical to understanding why corporate governance is so important.
This article will highlight key milestones in the history of corporate governance, including:
The history of corporate governance dates back to World War II when robust economic growth put massive power in the hands of corporate managers. Review a timeline of critical events before diving into each corporate governance evolution in-depth.
After World War II, the United States experienced strong economic growth, which strongly impacted the history of corporate governance. Corporations were thriving and proliferating. Managers primarily called the shots and expected board directors and shareholders to follow. In most cases, they did. This was an interesting dichotomy since managers highly influenced the selection of board directors. Unless it came to matters of dividends and stock prices, investors tended to steer clear of governance matters.
In the 1970s, corporate governance history began to change as the Securities and Exchange Commission (SEC) brought the issue of corporate governance to the forefront when they brought a stance on official corporate governance reforms. In 1976, the term corporate governance first appeared in the Federal Register, the official journal of the federal government. In the 1960s, the Penn Central Railway diversified by starting pipelines, hotels, industrial parks and commercial real estate. Penn Central filed for bankruptcy in 1970, and the public scrutinized the board. In 1974, the SEC brought proceedings against three outside directors for misrepresenting the company’s financial condition and a wide range of misconduct by Penn Central executives. Around the same time, the SEC caught on to widespread payments by corporations to foreign officials over falsifying corporate records. Corporations formed audit committees and appointed more outside directors during this era. In 1976, the SEC prompted the New York Stock Exchange (NYSE) to require each listed corporation to have an audit committee composed of all independent board directors, and they complied. Advocates pushed to get governance right by requiring audit committees, nomination committees, compensation committees and only one managerial appointee.
The 1980s ended the 1970s movement for corporate governance reform due to a political shift to the right and a more conservative Congress. This era brought much opposition to deregulation, another significant change in the history of corporate governance. Lawmakers advanced The Protection of Shareholders’ Rights Act of 1980, but it stalled in Congress.Debates on corporate governance focused on a new project called the Principles of Corporate Governance by the American Law Institute (ALI) in 1981. The NYSE had previously supported this project but changed their stance after they reviewed the first draft. The Business Roundtable also opposed ALI’s attempts at reform. Advocates for corporations felt they were strong enough to oppose regulatory reform outright without the restrictive ALI-led reforms.
Businesses had concerns about some of the issues in Tentative Draft No. 1 of the Principles of Corporative Governance. The draft recommended that boards appoint mostly independent directors and establish audit and nominating committees. Corporate advocates were concerned that if companies implemented these measures, it would increase liability risks for board directors.Law and economic scholars also heavily criticized the initial ALI proposals. They expressed concerns that the proposals didn’t account for the pressures of the market forces and didn’t consider empirical evidence. In addition, they didn’t believe that fomenting litigation would serve a purpose in advancing effective corporate governance.In the end, the final version of ALI’s Principles of Corporate Governance was so watered down that it had little impact on the history of corporate governance by the time it was approved and published in 1994. Scholars maintained that market mechanisms would keep managers and shareholders aligned.
The 1980s was also referred to as the ‘Deal Decade.’ Institutional shareholders grabbed more shares, which gave them more control. They stopped selling out when times got tough. Executives went on the defensive and struck deals to prevent hostile takeovers.State legislators countered takeovers with anti-takeover statutes at the state level. That, combined with an increased debt market and an economic downturn, discouraged merger activity. The Institutional Shareholder Services (ISS) was formed to help with voting rights. Shareholders fought with legal defenses, but judges often favored corporate decisions when outside directors supported board decisions. Investors started to advocate for more independent directors and to base executive pay on performance rather than corporate size.
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By 2007, banks had been taking excessive risks, and there was growing concern about a possible collapse of the world financial system. Governments sought to prevent fallout by offering massive bailouts and other financial measures.
The collapse of the Lehman Brothers Bank developed into a major international banking crisis, which became the worst financial crisis since the Great Depression in the 1930s. Congress passed the Dodd-Frank Wall Street Reform and Consumer Act in 2010 to promote economic stability in the United States, a significant milestone in corporate governance history.
The fallout from the financial crisis placed a heavier focus on best practices for corporate governance principles throughout the 2010s. Boards of directors felt more pressure than ever before to implement good governance practices like transparency and accountability. Strong governance principles encouraged corporations to have a majority of independent directors and well-composed, diverse boards. Advancements in technology improved efficiency in governance and created new risks as well. Data breaches were a new and genuine concern for corporations. The first targets were banks and financial institutions. As these institutions have bolstered the security measures in their governance framework, hackers have turned their efforts to smaller corporations within various industries, including governments.
Uncertainty has so far characterized the 2020s, a decade that will surely go down in the history of corporate governance. Kicked off by the COVID-19 pandemic and the subsequent breakdown of the supply chain, 2020 pushed many Americans to question the purpose of corporations. Global geopolitics like the war in Ukraine and the Israel-Palestine conflict have only further galvanized consumers to press corporations to make a stand.
Many corporations increasingly turned to a stakeholder model of corporate governance, which equally weighs and prioritizes the interests of all people affected by corporate activity — investors, employees, and the communities in which they operate. Consumers’ focus on environmental, social, and governance (ESG) partly drove that shift, but so did regulations like the SEC’s new Climate Disclosure Rules, which up the ante on accountability.
The 2023 adoption of the universal proxy rules also gave shareholders a new voice in the boardroom. That rule put shareholders’ director nominations on the same proxy card as the corporations’ nominations, affirming shareholders’ power to influence decision-making.
In 2024, boards of corporations and organizations of all sizes are finding that the best way for them to protect themselves, their shareholders and their stakeholders is to use technology to their advantage by taking a centralized approach to governance that helps boards put their best foot forward. However, the history of corporate governance continues to be rewritten. How we define corporate governance will continue to evolve in the coming years.
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