The History of

Corporate Governance (CG)

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Follow linkages to appreciate the evolution)
(accessed 06.08.17)
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 History of CG (1)
In 19th century United States, state
corporation laws enhanced the rights of
corporate boards to govern without
unanimous consent of shareholders in
exchange for statutory benefits like appraisal
rights, to make corporate governance more
efficient. Since that time, and because most
large publicly traded corporations in the US
are incorporated under corporate
administration friendly Delaware law, and
because the US's wealth has been increasingly
securitized into various corporate entities and
institutions, the rights of individual owners
and shareholders have become increasingly
derivative and dissipated.
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 History of CG (2)
In the 20th century in the immediate aftermath of the Wall
Street Crash of 1929 legal scholars such as Adolf Augustus
Berle, Edwin Dodd, and Gardiner C. Means pondered on the
changing role of the modern corporation in society. Berle and
Means' monograph "The Modern Corporation and Private
Property" (1932, Macmillan) continues to have a profound
influence on the conception of corporate governance in
scholarly debates today. From the Chicago school of economics,
Ronald Coase's "The Nature of the Firm" (1937) introduced
the notion of transaction costs into the understanding of why
firms are founded and how they continue to behave. Fifty years
later, Eugene Fama and Michael Jensen's "The Separation of
Ownership and Control" (1983, Journal of Law and
Economics) firmly established agency theory as a way of
understanding corporate governance: the firm is seen as a
series of contracts. Agency theory's dominance was highlighted
in a 1989 article by Kathleen Eisenhardt ("Agency theory: an
assessment and review", Academy of Management Review).
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 History of CG (3)

US expansion after World War II through the emergence

of multinational corporations saw the establishment of the
managerial class. Accordingly, the following Harvard
Business School management professors published
influential monographs studying their prominence: Myles
Mace (entrepreneurship), Alfred D. Chandler, Jr. (business
history), Jay Lorsch (organizational behavior) and
Elizabeth MacIver (organizational behavior). According to
Lorsch and MacIver "many large corporations have
dominant control over business affairs without sufficient
accountability or monitoring by their board of directors.”
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History of CG (4)
In the first half of the 1990s, the issue of
corporate governance in the U.S. received
considerable press attention due to the
wave of CEO dismissals (e.g.: IBM,
Kodak, Honeywell) by their boards. The
California Public Employees' Retirement
System (CalPERS) led a wave of
institutional shareholder activism
(something only very rarely seen before),
as a way of ensuring that corporate value
would not be destroyed by the now
traditionally cozy relationships between
the CEO and the board of directors (e.g.,
by the unrestrained issuance of stock
options, not infrequently back dated).
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 History of CG (5)

In 1997, the East Asian Financial Crisis saw

the economies of Thailand, Indonesia, South
Korea, Malaysia and The Philippines
severely affected by the exit of foreign
capital after property assets collapsed. The
lack of corporate governance mechanisms in
these countries highlighted the weaknesses of
the institutions in their economies.
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 History of CG (6)

In the early 2000s, the massive bankruptcies

(and criminal malfeasance) of Enron and
Worldcom, as well as lesser corporate
scandals, such as Adelphia Communications,
AOL, Arthur Andersen, Global Crossing,
Tyco, led to increased political interest in
corporate governance. This is reflected in the
passage of the Sarbanes-Oxley Act of 2002.
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 Evolution of
Corporate Governance
PERIOD HIGHLIGHTS
1970s Audit committees, two-tier boards, and
corporate responsibility
1980s Corporate collapses
1990s Corporate codes arrive e.g. Cadbury
Report (1992); King I (1994); OECD
(1999)
2000s Reactions to more corporate collapses
e.g. Sarbanes-Oxley Act (2002); King II
Report (2002); OECD (2004 update);
King III Report (2009)
2010s King IV (2017)
 Global Governance Codes [Hendrikse & Hefer-Hendriske
(2012:91-101) Refer to Ch. 9 for summaries on 1-21
1. Sir Adrian Cadbury Committee on Financial Aspects of
Corporate Governance (UK, 1992)
3. Greenbury Committee on Directors’ Remuneration
(UK, 1995)
5. Business Round Table (BRT), Statement on Corporate
Governance (USA, 1997)
7. CII (Confederation of Indian Industry) Code –
Desirable Corporate Governance (India, 1998)
9. OECD (Organisation of Co-operation and
Development) Principles of Corporate Governance
(Europe, 1999)
11. Recommendations of the Committee on Corporate
Governance (South Korea, 1999)
13. Kumar Mangalam Birla Committee on Corporate
Governance Principles (India, 2000)
15. The Combined Code – Principles of Good
Governance and Code of Best Practice (UK, 2002)
17. Commission on Public Trust and Private Enterprise
(USA, 2003)
19. OECD Principles of Corporate Governance
(Updated) (Europe, 2003)
21. King Report on Governance for South Africa and the
King Code of Governance (King III) (South Africa, 2009)
2. Mervyn King’s Committee on Corporate Governance (South
Africa, 1994)
4. CalPERS (California Public Employees Retirement System)
Global Corporate Governance Principles (USA, 1996)
6. Hampel Committee on Corporate Governance, (UK, 1998)
8. Blue Ribbon Committee on Improving the Effectiveness of
Corporate Audit Committees (USA, 1999)
10. CACG (Commonwealth Association for Corporate Governance)
Principles for Corporate Governance in the Commonwealth (1999)
12. European Association of Securities Dealers (EASD), Corporate
Governance Principles (European Union, 2000)
14. King Report on Corporate Governance for South Africa (South
Africa, 2002)
16. Sarbanes-Oxley Act (Accounting Reform Act, 2002)
18. The Australian Stock Exchange (ASX) Corporate Governance
Councils Principles of Good Corporate and Best Practices
Recommendations (2003)
20. The Combined Code (Updated) (UK, 2006)
22. King IV Report on Corporate Governance for South Africa (South
Africa, 2016)
 CG Definition (1)
Corporate governance is the set of processes,
customs, policies, laws, and institutions affecting
the way a corporation (or company) is directed,
administered or controlled.

An important theme of corporate governance is the

nature and extent of accountability of particular
individuals in the organization, and mechanisms that
try to reduce or eliminate the principal-agent problem.
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 CG Definition (2)
India's 2003 SEBI Committee on
Corporate Governance defines
corporate governance as the
"acceptance by management of the
inalienable rights of shareholders as
the true owners of the corporation and
of their own role as trustees on behalf
of the shareholders. It is about
commitment to values, about ethical
business conduct and about making a
distinction between personal &
corporate funds in the management of
a company.”
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 CG Definition (Whatis.com, 2006)
Corporate governance is a term that refers broadly to the
rules, processes, or laws by which businesses are
operated, regulated, and controlled.

The term can refer to internal factors defined by the

officers, stockholders or constitution of a corporation, as
well as to external forces such as consumer groups,
clients, and government regulations.
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 Definition of Corporate Governance
[Rezaee (2009)]
The process affected by a set of
legislative, regulatory, legal, market
mechanisms, listing standards, best
practices, and efforts of all corporate
governance participants, including the
company’s directors, officers, auditors,
legal counsel, and financial advisors,
which creates a system of checks and
balances with the goal of creating and
enhancing enduring and sustainable
shareholder value, while protecting the
interests of other stakeholders.
 Aspects of Corporate Governance
[Rezaee (2009)]
In the post-SOX era, Corporate Governance further evolved to the
integrated aspects of meeting both compliance requirements and
promoting a strategic business imperative. There are three
aspects: shareholder aspect, stakeholder aspect, and an integrated
aspect.

Shareholder Aspect
This aspect is based on the premise that shareholders provide
capital to the corporations that exists for their benefit.

Stakeholder Aspect
Stakeholders are now becoming more engaged in a company
performance on a variety of economic, governance, ethical, social
and environment issues.
Integrated Aspect
Modern corporate governance emphasizes BOTH financial aspects
of increasing shareholders value AND an integrated approach that
considers the rights and interests of all stakeholders.
 Tricker (2012:29-30) Definitions of CG (1)
Perspective Definition
An • Cadbury report (1992) – “the system by which
operational companies are directed and controlled”.
• Hilmer (1993), Australia - emphasized the strategic
responsibility of the board, suggesting that “the
board’s key role is to ensure that corporate
management is continuously and effectively striving
for above average performance, taking account of
risk, (which) is not to deny the board’s additional role
with respect to shareholder protection”.
• OECD (2001) – “[C]orporate governance is about the
procedures and processes according to which an
organization is directed and controlled”.
Operational perspective: focuses on governance structures, processes
& practices; focuses on the shareholders, the board and the
management; has been the basis for much work in CG; and the
concept of best practices of and interactions between them is
fundamental to the CG codes)
 Tricker (2012:30) Definitions of CG (2)
Perspective Definition
A • OECD report adds - ”[T]he corporate governance structure
relationship specifies the distribution of rights and responsibilities
among the different participants in the organization-such as
the board, managers, shareholders and other stakeholders-
and lays down the rules and procedures for decision
making.”
• Corporate library www.thecorporatelibrary.com – “the
relationship among shareholders, directors and managers of
a company, as defined by the corporate charter, by-laws,
formal policy, and the rule of law.”
• California Public Employees Retirement System (CalPERS), a
significant institutional investor – included “the primary
participants are shareholders, company management (led by
the chief executive officer) , and the board of directors”.
• Monks & Minow (1995) – added the employees: “[C]orporate
governance involves the relationship among various
participants, including the chief executive officer,
management, shareholders, and employees, in determining
the direction and performance of corporations.”
 Tricker (2012:30) Definitions of CG (3)
Perspective Definition
A • OECD definition includes “other stakeholders”, as
stakeholder well as the shareholder, board, and management
• Tricker (2012) wider relationship perspective –
“[C]orporate governance is about the activities of
the board and its relationship with the shareholders
or members, and with those managing the
enterprise, as well as with the external auditors,
regulators, and other legitimate stakeholders”.
• Demb & Neubauer (1992) - “[C]orporate governance
is the process by which corporations are made
responsive to the rights and wishes of
stakeholders”.
A financial • Shleifer & Vishny (1997) – “Corporate governance
economics deals with the way suppliers of finance assure
themselves of getting a return on their investment”.
Financial economics has been a dominant contributor of scholarly
research into CG, applying agency theory to board-level activities.
 Tricker (2012:31) Definitions of CG (3)
Perspective Definition
A societal • Blair (1995) – CG is “the whole set of legal, cultural, and
institutional arrangements that determine what public
corporations can do, who controls them, how that control
is exercised, and how the risks and return from the
activities they undertake are allocated”.
• Cadbury (2000) – “Corporate governance is concerned
with holding the balance between economic and social
goals and between individual and communal goals. The
corporate governance framework is there to encourage the
efficient use of resources and equally require
accountability for the stewardship of those resources. The
aim is to align as nearly as possible the interests, of
individuals, corporations and society.”
The societal perspective sets CG at a high level of abstraction, includes all
stakeholders, raising interesting philosophical issues about relationships
between the individual, the enterprise, and the state, and is reflected in the
growing interest in stakeholder theory and corporate social responsibility.
 19
Definitions of Governance, Business Governance & CG
Hendrikse & Hefer-Hendrikse (2012:496)

(a)Governance - “The guiding principle

for directors and management to
operate in the best interests of all
stakeholders, to optimise effective
leadership, optimise returns, and
minimise risk as well as the abuse of
power by leaders.”
(b)Business governance - “The
framework by which directors can
manage effectively and carry out the
functions of business.”

8/12/2017
 20
Definitions of Governance Business Governance & CG
Hendrikse & Hefer-Hendrikse (2012:496)
(a) …
(b) …
(c) Corporate governance: “The way a business is directed
and governed. The strategy, policies and procedures that
directly impact on organisational performance and
stewardship, and its capacity to be accountable to its
various stakeholders. The exercise of economic, political
and administrative authority to manage a business’s
affairs at all levels. It comprises the mechanisms,
processes and institutions through which shareholders,
stakeholders and leadership articulate their interests,
exercise their legal rights, meet their obligations and
mediate their differences. Can be viewed as the control
mechanism that ensures that the right checks and
balances are in place to prevent the risk of
mismanagement from conflicting priorities, misallocation
of resources, conflicts of interest, misaligned incentives
and some of the business weaknesses associated with
excessive power.” 8/12/2017
 Bloomfield (2013:19) Definitions of CG (1)
Private or Commercial Sector Public Sector
• Corporate governance is the • A series of principles, which are
governing structure and processes usually embodied in formal
[procedural governance] in an controls, in agencies which seek to
organization that exists to oversee redress market imperfections by
the means by which limited acting for, on behalf of and with
resources are efficiently directed express approval of the State,
to competing purposes for the use through all or some of the activities
of the organization and its of policy-making, management and
stakeholders, including the regulation; mostly using resources
maintenance of the organization without the intention of generating
and its long-term sustainability a profit and providing more or less
[behavioural governance], set and appropriately-transparent
measured against a framework of information about the means of
ethics [structural governance] and arriving at the allocation of
backed by regulation and laws resources in the absence of a set
[systemic governance]. of rational economic methods of
achieving those ends.
• Following Bloomfield’s line of thought, define corporate governance for the
civic sector.
 Bloomfield (2013:25) Definition of CG (2)
Main Definition (Revisit after covering CG Theories)
• The governing structure and processes in an
organization [nexus of contracts theory] that exists
to oversee the means by which limited resources
are efficiently directed to competing purposes
[transaction cost theory / resource dependence
theory] for the use of the organization and its
stakeholders, including the maintenance of the
organization and its long-term sustainability
[stewardship theory / stakeholder theory], set
against a background of managerial and
shareholder behaviour implicitly measured against a
framework of ethics and backed by regulation and
laws [agency theory].
King IV (2016:11) Definition of CG

The exercise of ethical and effective

leadership by the governing body
towards the achievement of the
following outcomes:
• Ethical culture;
• Good performance;
• Effective control;
• Legitimacy.
 King IV (2016) Components
Governing Body Responsibilities
Strategy Policy Oversight Accountability

17 Principles
and many recommended practices

Outcomes
Ethical Good Effective Legitimacy
culture performance control