Corporate Governance History
Corporate Governance History
Corporate Governance History
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JMH
21,2
Corporate governance as a
reform movement
Bernard Mees
Centre for Sustainable Organisations and Work, RMIT University,
194 Melbourne, Australia
Abstract
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Purpose – The purpose of this paper is to consider the way in which agency theory has crowded out
other approaches to understanding the governance of modern businesses. The paper rescues the
meaning and context which informed the American corporate governance reform movement originally
and demonstrates how the economically predicated agency approach became dominant in academic
considerations of corporate governance.
Design/methodology/approach – Both primary and secondary sources were considered in a
Foucauldian history of ideas approach.
Findings – Other approaches to corporate governance have been pushed out of the mainstream of
corporate governance discourse by an economic model which excludes many of the key issues which
informed the notion originally.
Practical implications – Dominant academic attitudes to corporate governance have occluded other
ways in which the governance of corporations can be understood.
Originality/value – Previous accounts of corporate governance have ignored the alternative
approaches represented before agency theory became dominant.
Keywords Corporate governance, Management history
Paper type General review
Introduction
If we are to believe some business scholars, corporate governance is a very old thing – as
old as the seventeenth century and the first joint-stock companies (Frentrop, 2003;
Morck, 2005). Others point to Smith’s (1776, v.3.1) recognition of the “other people’s
money” problem or cite the classic analysis of the US securities industry by Adolf A.
Berle, Jr. and Gardiner C. Means at the end of the roaring 20s as foundational
contributions to the idea (Berle and Means, 1932; Herrigel, 2006; Mallin, 2013, p. 17). Yet
the expression “corporate governance” is an American coinage of the 1960s and is
presently conceptualized mainly in terms of an economic approach which often acts to
exclude other perspectives. The time and date of this development is also much more
recent than is often supposed. As British corporate governance pioneer Bob Tricker has
recently claimed “back in the 1970s the world wasn’t using the phrase ‘corporate
governance’ at all […] the work of the board was hardly thought of at all” (Corporate
Board, 2009). The governance of listed enterprises was not a key concern of
management scholarship before that time.
Journal of Management History Issues concerning governance have surely existed in business since long before
Vol. 21 No. 2, 2015
pp. 194-209
the formation of the first joint-stock companies, before the Dutch East India
© Emerald Group Publishing Limited
1751-1348
Company or the first Delaware corporation. Tracing the history of corporate
DOI 10.1108/JMH-01-2014-0015 governance back centuries before the 1960s and 1970s, however, might be criticized
as representing little more than antiquarianism and not truly history in a developed Corporate
sense. The late nineteenth century saw many legal debates and key common law governance
judgments which sought to prescribe the proper limits and responsibilities of
directorship, and the issue of “directors who do not direct” re-emerged as a
particular concern in the 1930s (Samuel, 1933; Douglas, 1934). Yet writing in 1932,
Berle and Means merely spoke of “corporate finance”, “control” and “powers in
trust” – antiquarian understandings of corporate governance have tended to occlude 195
the meaning that the expression had when it was first coined.
Considerations of the proper relationship between employees, owners and
directors in a democratic society also have a long history in Europe, where debates
over worker representation and the effective functioning of supervisory boards were
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particularly common in the 1950s and 1960s (Neuloh, 1956; Meyers, 1958; Clegg,
1960; Czubek, 1968; Peterson, 1968). Yet the notion of “corporate governance” is
commonly held to represent a quite different matter to that which led to the
development of a requirement for employee-nominated directors on the boards of
Swedish and German firms (cf. Haug, 2004a, 2004b; Müller-Jentsch, 2008) and has
rarely been a matter of discussion in management history summaries (Wren and
Bedeian, 2009, pp. 427-429). Instead the intellectual tradition which has grown up
about corporate governance since the 1960s has been limited by its development,
particularly in terms of what Foucault (2003, pp. 6-8) termed “global theory”.
Foucault challenged historians of ideas to investigate – indeed excavate – the
“subjugated knowledges” that the dominance of a single intellectual approach
usually brings to the production of knowledge. And in the case of corporate
governance, the “global theory” is the agency approach, first formulated by the
American economists Jensen and Meckling in 1976 but which was only adopted into
the mainstream of corporate governance debate in the 1980s (cf. Eisenhardt, 1989).
The “subjugated knowledges” include the earlier discourses of industrial
democratization, business philosophy and a consumer-focused understanding of the
role of corporations in society. How this subjugation occurred historically is the key
focus of this paper.
Washington in light of the success of his 1965 exposure of the American automobile
industry, Unsafe At Any Speed, had begun a practice of producing reports of areas of
economic, legal and social concern (Graham, 2000; Marcello, 2004). And Nader, Green
and Seligman had devoted an entire chapter to corporate governance entitled “Who
rules the corporation?”, where they bemoaned US “corporate autocracy” as being “akin
to a political state in which all powers are held by a single clique” (Nader et al., 1976,
pp. 75-131, p. 118). In their reply to Jacoby (1977), they further observed that “corporate
governance is often undemocratic and ineffective” – they proposed a major
restructuring of boards; elevating the rights of stockholders, employees and local
communities; and rescuing corporations from managerial domination. Yet later that
year Wall Street Journal journalist William D. Hartley still thought that the expression
required definition for his readers, describing shareholder activists proposing
resolutions “around what is termed ‘corporate governance’ such as voting procedures
for directors” (Hartley, 1977).
The Nader report into US corporate governance reflected a controversy that had
already broken out over the proper duties of managers and directors of American
corporations especially since the spectacular Penn Central Transportation Company
bankruptcy of 1970 and the appearance of Harvard Business School Mace’s
withering (1971) critique of American boards (Daughen and Binzen, 1971; Sobel,
1977; Ocasio and Joseph, 2005; Cheffins, 2013). Eells had been especially focused on
the “excessive materialism”, the “cynical disregard for moral and religious
standards” and the “undemocratic values” of US business in the 1960s, and his call
“to develop a theory of corporate governance consistent with the ideals of a
democratic society” had been adopted by many critics of corporate management
(Eells, 1960, p. 52; Epstein, 1969, pp. 262-268; Dahl, 1972; Moore, 1973; Stone, 1975).
With its popularization, however, Eells’s expression soon began appearing in more
conservative legal discourse, and the June 1976 hearings on “corporate rights and
responsibilities” held before the US Senate further established the broader usage of
the term (cf. Mautz and Neumann, 1970, p. 2 and p. 40; American Bar Association,
1975, p. 48; Committee on Commerce, 1976; Schwartz, 1976; and the textbook of
Conard, 1976, pp. 317-415). Soon the US Congress and the Securities and Exchange
Commission (SEC) were considering wide-ranging changes to federal corporations
law and securities regulation – “corporate governance” was becoming discursively
canonical. Law conferences were held linking corporate governance with social
responsibility; public statements for and against regulatory reform were thrashed
out by lobbyists and scholars; and in 1978, the American Law Institute inaugurated
a corporate governance project which had the aim of standardizing and rendering Corporate
explicit the many issues of common law that informed and impinged upon US governance
“corporate directorship” (Securities and Exchange Commission, 1977, pp. 35-36;
Ruder, 1979; Small, 1979; Sommer, 1980; Fischel, 1982; Scott, 1983). SEC chairman
Harold M. Williams had begun his four-year term in 1977 amid a hail of public
criticism of corporate behavior and deficiencies in US securities regulation (Gerth,
1981; Seligman, 2003, pp. 516-568). But after the flurry of reform proposals and 197
institution of legislation such as the Foreign Corrupt Practices Act of 1977, the drive
for corporate governance reform soon slipped off the American political agenda.
Yet already the notion of corporate governance seemed to have undergone a
bifurcation. The main issues surrounding the new concern, for example, were
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summarized by “corporate doctor” Victor H. Palmieri in the Wall Street Journal in 1978
(and cf. Palmieri, 1979) in a manner that is clearly consistent with how the notion is still
understood today.
The subject of “corporate governance” has become a favorite preoccupation of
Congressmen, SEC commissioners, legal scholars and Naderites. “How can we improve
the way corporations are run?” is the question they are asking. The answers come in
three clusters:
(1) making sure that directors are “independent” (i.e. not under management
domination);
(2) increasing the responsibility of the audit committee of the board for monitoring
sensitive disclosure issues such as questionable payments; and
(3) raising the level of federal and state standards for corporate behavior in relation
to investors and the public.
This is clearly a different form of “corporate governance”, however, than that which
Eells was writing about in the early 1960s or as was reflected in the concerns over
“corporate democracy” raised by critics such as Nader and Green. But even such a
conservative statement would soon prove out of kilter with the changing political
circumstances which surrounded the 1979 oil crisis, the Iranian hostages’ drama and
the consequent end of the Carter administration.
Unsurprisingly, the incoming Reagan administration showed little stomach for
further corporate law reform. Some of the 1970s’ progress on matters of corporate
disclosure and accountability for bribery in foreign subsidiaries remained intact,
but a proposed bill on “corporate democracy” to force corporate boards to be more
representative of stakeholder interests did not survive the 1980 congressional
elections (Green et al., 1979; Wall Street Journal, 1980; Green, 1980; Ruder, 1981). The
movement begun in the early 1970s to install more non-executive directors on
corporate boards and increase the number of listed firms with audit committees had
largely been completed by that time, with the annual studies of executive recruiters
Korn/Ferry tracking the number of organizations which had accepted the need for
more board independence particularly in light of the scandals that had emerged at
the start of the decade (Korn/Ferry, 1973ff). Williams had promoted a goal of only
one executive director on corporate boards – and audit committees (first
recommended by the SEC in 1940) had become a mandatory requirement under the
listing rules of the New York Stock Exchange in 1978 (Teed, 2010). But John S.R. Shad, the
JMH incoming head of the SEC in 1981, did not hold the same ambitions as had his
21,2 Democrat-appointed predecessor as the main ambition of corporate reform in the
Reagan years became deregulation. As a former SEC commissioner Roberta S. Karmel
put it to a New York Times columnist in 1982, the moral dimension of reform
encapsulated in the expression “corporate governance” had fallen off the SEC’s agenda
at the expense of economic efficiency (Noble, 1982).
198 Consequently, the (tentative) corporate governance common law restatement
published by the American Law Institute in 1982 was particularly opposed by the
Business Roundtable, set up in 1972 with the support of the Nixon administration as the
leading US advocate of big business (Lewin, 1982; Business Roundtable, 1983; Seligman,
1987). Proposals to increase “corporate democracy” or to adopt the “stakeholder theory”
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remain decidedly American in style and focus until the early 1990s.
Tricker (1984), however, was the first to publish a book entitled Corporate
Governance and seemed to have no inkling of the very moral tone that the term had
implied when it was first used in America (cf., also, however, Hopt and Teubner, 1984;
Baldwin, 1984). Indeed, very few British commentators used the American expression at
the time, calls for more independent directors by Jonathan Charkham of the reform
group Promotion of Non-Executive Directors (ProNED), for example, couching their
pleas in terms of board professionalization and improving the performance of British
firms. ProNED, which had been established in 1981 under the auspices of the Bank of
England, performed a similar public function to Korn/Ferry and its annual reviews of
US boards (Charkham, 1983, 1984; cf. Charkham, 1994). With the emergence of the
takeover frenzy that was such a public feature of both British and American business at
the time, matters of corporate control (and management defense strategies) seemed to be
more important as terms such as “greenmail” and “poison pill” duly entered the broader
vocabulary.
By the late 1980s, the key corporate governance debates in the USA concerned
dual-class shares, executive pay and state attempts to protect companies from
takeovers. The emergence of Reaganism and Thatcherism had produced a very
different attitude to matters of corporate reform. Indeed, even some German scholars
began to take a new look at the question of firm structure (or Unternehmensverfassung)
at the time, clearly influenced by American discourses of corporate governance (Brose,
1984; Bleicher et al., 1989). The influence of American economic theorists, particularly
the considerations of agency and control by Jensen, Meckling and Fama, served to
establish a body of scholarship that would come to dominate most later academic
characterizations of corporate governance (Jensen and Meckling, 1976; Fama, 1980;
Fama and Jensen, 1983; Dailey et al., 2003). But it was the debate over the role and
effectiveness of independent directors which was the main issue that concerned the
British business community during the decade which has since come to be renowned as
the high water mark of conservative reaction. When the expression “corporate
governance” was used at all in British (or European) comment at the time, it was clearly
an Americanism used to describe a particular approach to improving the productive
functioning of company boards.
The most pronounced feature of corporate governance reform in the 1990s,
however, was the emergence of what Hopt (2007) has styled the “code of conduct
movement”, a development whose genesis is usually linked to the appearance of the
UK’s Cadbury Report in 1992. The Cadbury Report, produced by a committee
JMH chaired by former confectionary-industry executive Sir Adrian Cadbury, was not
21,2 influenced by agency theory – Cadbury and his colleagues were not interested at all
in American models of economic efficiency. The deregulatory and hard-nosed
climate of the 1980s had led to the emergence of a culture of business personalization
in the form of outspoken tycoons, “paper entrepreneurs” and other forms of publicly
unpopular corporate “raiders” (Johnston, 1986; Slater, 1987; Fallon and Srodes,
200 1987), and the Cadbury committee’s primary aim was to restore confidence in British
capital markets in light of the many ethical failures of the 1980s (Jones and Pollitt,
2006; Spira and Slinn, 2013).
The UK’s Financial Reporting Council, the London Stock Exchange and the
accounting profession were the main supporters of the Cadbury committee, the need for
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which had become apparent after several lesser-known company collapses (Cadbury,
2002, pp. 10-12). But it was the much more public business scandals that were only
revealed after the establishment of the Cadbury committee which most informed the
reception of its final report. The collapse of the Bank of Credit and Commerce
International (in light of CIA accusations that the London-listed Pakistani bank had
become involved in money laundering and gun running) and the revelation that
newspaper tycoon Robert Maxwell had raided his employees’ pension fund during the
implosion of his Mirror Group gave the Cadbury Report much of its moral authority
(Truell and Gurwin, 1992; Greenslade, 1992).
The development of the corporate governance code established by the Cadbury
committee set in train a number of similar bodies and the promotion of international
“Cadburyfication” (Governance, 2000), first in South Africa (with the King Report),
then in Canada, France, Japan, The Netherlands, India and Germany (King, 1994;
Dey, 1994; Vienot, 1995; Keidanren, 1997; Peters, 1997; Confederation of Indian
Industry, 1998; Cromme, 2002). And it was not until 1997 that the USA Business
Roundtable (1997) prepared a statement that seemed at last to support corporate
governance reform after the American Law Institute had finalized its second
corporate governance report in 1994 (10 years after it had begun working on the
project; cf. Smith, 1993; Mitchell, 2010). By this time, institutional investors
(particularly the American state and city pension funds and their Council of
Institutional Investors, founded in 1985) had begun to join other shareholder
activists in the USA in their efforts to reform corporate boards. Yet the first
institutional pressure on corporate governance in America had only become
noticeable in the late 1980s. Before that time, shareholder activism had usually been
confined to small groups of irate stockholders, union-controlled pension funds and
responsible investment groups such as the Investor Responsibility Research Center
(founded in 1972 by a consortium of Ivy League universities) and the Interfaith
Center on Corporate Responsibility (established in 1974 to protest against
corporations involved in Apartheid South Africa) (Drucker, 1976; Gray, 1983;
Harrington, 1992, pp. 8-30; Robinson, 2002). The main reason for Cadburyfication
internationally had been the growing financialization of international business that
has become such an evident characteristic of globalization. Having a Cadbury-style
set of national corporate governance principles became a necessity if a local
securities industry was to be able to attract and retain international finance capital
(Ireland, 2009).
Various standards and surveys of directorship had been promoted by Corporate
longstanding organizations such as the American Bar Association, the National governance
Industrial Conference Board and the British Institute of Directors prior to the
establishment of the Cadbury committee and similar sets of corporate governance
principles had been developed in the USA and Australia while the Cadbury
Committee was sitting (Read, 1953; Watson, 1953; Ethe and Pegram, 1959; Tangley,
1961; Bacon, 1967; Conference Board, 1972; American Bar Association, 1978; Bacon 201
and Brown, 1977; Mills, 1981; Bosch, 1991; Working Group on Corporate
Governance, 1991). Yet rather than being rooted in the earlier calls for industrial and
corporate democracy, or even what Evans et al. (2012) call the (canonical)
“history-of-management-thought perspective”, the main feature of the growth of
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Conclusion
Many of the issues which inform modern debates on corporate governance first
became apparent in the USA. From the need for meaningful independence of
directors from management to improving the timeliness and quality of financial
disclosure, US lawmakers and activists have developed a rich legacy of debate and
reform in the corporations and securities sector. And clearly, the economic, ethical
and institutional analyses that have proved so important to the emergence of
corporate governance theory are largely American contributions. Yet now when
scandals emerge, such as the 2008 collapse of Lehman Brothers, the expression
“corporate governance” is splattered across the financial pages of countries right
across the world; where failings in the corporate world were once criticized as
mostly due to poor ethical and professional standards, now the expression
“corporate governance” is used in analyses of corporate failure and calls for reform.
Eells’s term has undergone much change in the way it has been used over the past 50
years, but it has been dominated since the 1980s by a conservative economic
approach which was not part of its original formulation.
Corporate governance was established by its pioneers as a discourse of business
reform which aimed to improve the performance and standards of the directorial and
executive teams at the top of listed companies, and only latterly to improve the
JMH confidence of international investors in local securities markets. Crystallizing as a
21,2 nameable concept first in the late 1970s, agency theory has become the dominant
academic approach, occluding older and rival discourses of business philosophy,
consumer protection and employee democracy. Where once legal and business figures
spoke of reform in corporations and securities law or the duties that the comptrollers of
large publicly traded firms have to the broader public, now the term “corporate
202 governance” has emerged internationally as a catch all to explain and embrace all
manner of relationships of power and influence which are associated with listed
business entities. But the emergence of agency theory has ensured that it has done so in
a manner that has largely limited and failed to take into account other key discourses
concerning the nature and purpose of corporate boards, management and the proper role
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of business in society.
Indeed, Donaldson (2012) argues that the main proponents of agency theory have
conflated economic description with reformatory action – the normative dimension
of corporate governance (i.e. its standing as a reform movement) has largely been
occluded by a politically conservative approach which constrains rather than
furthers intellectual debate about the nature and state of corporations and securities
law, and the proper purpose of business in society. Taking the conservative,
shareholder-primacy model assumed by agency theory as somehow intellectually
immutable undermines rather than furthers the legacy of Eells, Nader, Cadbury and
the other foundational contributors to modern understandings of corporate
governance. An excavation of the past of the broader discourse of corporate
governance reform reveals a very different archaeology of knowledge than is
recognized in most explorations of the matter presently, much as Foucault argued
that the key challenge for historians of ideas is to interrogate the reasons for the
subjugation of earlier knowledges by global approaches such as agency theory and
to rescue alternative intellectual traditions which may have been too readily passed
over, dismissed and forgotten.
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include Terror, War, Tradition (edited with Samuel P. Koehne) and The Science of the Swastika.
He has produced over 60 published research papers in management and labor history, intellectual
history and historical linguistics. Bernard Mees can be contacted at: [email protected]
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