6/13/24, 8:40 AM What is the history of corporate governance and how has it changed?

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What is the history of corporate governance and

how has it changed?
March 18, 2024 • 4 min read

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:
1
A complete corporate governance timeline
The growing emphasis on corporate governance
The impact of economic activity on corporate governance history
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6/13/24, 8:40 AM What is the history of corporate governance and how has it changed?

How technology has influenced modern governance

Trends that point to the future of corporate governance

Corporate governance history at a glance

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.

Year Corporate governance milestone

17th
The Dutch East India Company introduces the concept of joint-stock companies.
Century

19th
Limited liability becomes a legal principle, separating personal and corporate assets.
Century

The Securities and Exchange Commission (SEC) is established in the United States to
1930s
regulate securities markets.

World War II ends. Investors are unconcerned about governance as corporate

1940s
performance soars.

1970s Corporate governance enters the spotlight as the SEC takes a stance on reforms.

The rise of hostile takeovers prompts a focus on shareholder rights and board
1980s
accountability.

The U.K.’s Committee on the Financial Aspects of Corporate Governance (Cadbury

1992
Committee) releases its Code of Best Practice.

The U.K. Corporate Governance Code replaces the Cadbury Code of Best Practice,
1998
incorporating broader governance principles.

The United States enacted the Sarbanes-Oxley Act to improve corporate governance
2002
and financial reporting.

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Year Corporate governance milestone

2008 Again, governance comes to the fore as the U.S. economy experiences a crisis.

Dodd-Frank Wall Street Reform and Consumer Protection Act is passed in the U.S.,
2010
introducing additional corporate governance reforms.

The U.K. Corporate Governance Code is revised, focusing on the relationship between
2016
companies and stakeholders.

Business Roundtable issues a new statement emphasizing the purpose of a

2019
corporation and the importance of all stakeholders.

Consumers push corporations to act more ethically and sustainably following the
2020
COVID-19 pandemic and the resulting economic slump.

2023 New universal proxy rules pass, affirming the voice of shareholders in the board room.

Technology sweeps the board room as boards increasingly turn to centralized

2024
governance platforms to aid their decision-making.

World War II - 1980s: Corporate growth emphasizes

developing corporate governance

Post-World War II
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.

1970s
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
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6/13/24, 8:40 AM What is the history of corporate governance and how has it changed?

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: A corporate governance reform counter-reaction

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.

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The ‘Deal Decade’ leads to shareholder activism

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.

2008: Financial crisis changes corporate governance history

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.

2010s: Corporate governance surges as risks are on the rise

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.

2020s: Global economic uncertainty rattles stakeholders —

and the board room
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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.

2024: The history of corporate governance in the 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. See our list of
top corporate governance trends for 2024 and beyond to master the current governance
landscape and the changes that may be on the horizon.

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6/13/24, 8:40 AM What is the history of corporate governance and how has it changed?

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