The early commercial voyages and enterprises commenced the governance of corporations. The East India Company and the business partnership betwixt joint stock companies are some of the instances. With time, however, the establishment of corporations became more comprehensive and elaborative. These elaborative establishments were also codified into the company law so that conceptualization of corporate governance became multi-layered. The proemial phase of corporate governance was characterized by periodic frauds and scams, for example, the South Sea Bubble and Victorian novels are filled with corporate misdemeanours and transgressions.
The exordium of the limited liability company in 1856 led to a rapid escalation in incorporation. The ability to trade shares on a stock exchange encouraged the expansion of successful companies and in the extermination of failures.
Initially, in various limited liability companies, the shareholders and their directors were closely related. This close proximity facilitated and enhanced communication and the right issue of shares required for fund expansion.
As companies grew and expanded, the need for full-time management increased. A typical company in the early twentieth century constituted of a part-time chairman, a person with City connections, and a managing director who was accountable to the board for handling the company’s business. Later it became usual to appoint a few other executive directors who were responsible for prime activities such as sales, research, and manufacturing.
The model survived for many years but was strained and compressed after the second world war. The emergence of the economic dominance of the US and the resurgence of Germany and Japan constructed competitive strain and pressures which the Empire wasn’t accustomed to. Their shareholder profile adapted and two groups of shareholders emerged: individual and institutional. Another group whose influence increasingly became imminent was the news media: whose desideratum was to exploit the weaknesses in a company’s performance and to find negative stories about individual directors.
What is Corporate Governance?
Cadbury Committee of December 1992, elucidates and exemplifies corporate governance as “A system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies. The shareholders’ role in governance is to appoint the directors and the auditors and to satisfy themselves that the appropriate governance structure is in place.’
A decade later, the Higgs Report had a disparate cynosure and defined it as: Corporate governance provides an architecture of accountability – the structures and processes to ensure companies are managed in the interests of their owners.
The stakeholders in Corporate Governance.
The governance of corporations is an arrangement for advancing and enhancing the contribution of a number of disparate parties to a purpose that they are impelled to share. These discordant parties are usually referred to as the “stakeholders” of the enterprise and their capability to assist and encourage or cause destruction to the enterprise may differ depending on the circumstances. Following is the list of potential stakeholders but it does not include uninvited stakeholders, such as the media or special interest groups.
1. Shareholders
2. Board of Directors
3. Customers
4. Suppliers
5. Employees
6. Community
7. Government
Why Corporate Governance became important?
Corporate governance became important after the classic model of meeting shareholders expectations was challenged as the model had started producing declining results and was also challenging the primacy of shareholders. Britain’s share of world GDP declined from 25 per cent to 5.6 per cent between 1900 and 2000 as a result of which the empire’s companies were deposed out of major markets such as shipbuilding, vehicle manufacturer, computers and so on. This deterioration was strengthened by numerous company scandals from 1970 onwards: BCCI, Maxwell, Polly Peck, Guinness are few examples. Since these scandals directly challenged the credibility of the City of London (as a market for investors) the Stock Exchange launched the Cadbury Inquiry into the financial attribute of corporate governance in 1990.