The evolution of the species
OPINION |

The evolution of the species

MODELS OF CORPORATE GOVERNANCE HAVE CHANGED AND ADAPTED ACROSS PERIODS AND PLACES THROUGHOUT HISTORY, INFLUENCED BY VARIOUS EXTERNAL FACTORS: FROM COMPANY SIZE RESULTING FROM TECHNOLOGICAL CHANGE TO THE EMERGENCE OF GLOBAL INVESTORS, LEADING TO INTERNATIONAL GOVERNANCE STANDARDS

by Andrea Colli, full professor at Department of social and political sciences

The set of normative elements that today goes under the label of “corporate governance” did neither emerge with the appearance of the first joint stock companies, nor when companies started to adopt sophisticated organizational structures beyond personal, individual management style. It emerged when some other changes impacted the modern corporation.
First of all, the enlargement of the size of the enterprise (imposed by technological change making mandatory the exploitation of scale economies) to such extent that the necessary additional investments require an enlargement of its capital much beyond the capabilities of its founder or of the following generations in case of family firms.
The consequent necessary support of third actors providing financial resources, either in the form of capital and/or debt. Banks (both commercial and merchant ones) performed this role, together with rich individuals but also by an increasing number of small private investors acquiring shares traded in stock exchanges. The increase in the number of the “holders” of debt and shares of capital made surfacing a conflictual relationship, between different categories of shareholders, “majorities” and “minorities”.
Simultaneously, an earthquake shocking the organizational structure of the corporation. To different extent in different industries (and places), ownership was not always, anymore, a synonym of management. The owners increasingly delegated the business of running the corporation to skilled professionals in exchange of reasonable returns over their investments, in the form of profits, and share value. Another conflictual relationship emerged, then that between the providers of resources – the shareholders – and those using those resources for purpose of profit (supposedly, in the interest of the shareholders, and not of themselves).
Furthermore, an institutional commitment to develop a regulatory framework in order to regulate and put under control the above-mentioned potential conflicts which the process of corporate growth generated.
Historically, the events described above do not occur simultaneously, in all sectors, and everywhere in the industrialized World. The events started to take place in the US., over a multi-decennial period roughly starting from the last two decades of the 19th century, until the Great Crisis in the interwar years. Similar developments took place however elsewhere in the industrialized World, but with several “variants”, due to the adaptation of capitalism to local culture and institutions. In Europe, for instance, the “linearity” of the US. model was heavily altered by the preponderance of banks over stock exchanges, of concentrated ownership (often including that of Governments) still overlapping with management, and of the presence of strong and assertive workers’ movements – all elements which generated peculiar models of governance in the corporate affairs.

Furthermore, the evolution of corporate governance took place in coincidence with traumatic events which prompted institutional action in order to provide a regulation of potential conflicts and of the behavior of stakeholders. Again, this was an “asynchronous” process. Already in the 1930s the Great Crisis in the US., provoked a vast array of reforms as for instance the Standard Exchange Commission (SEC) dramatically enhancing the quality of financial reporting of listed companies, while in Europe were the privatizations and liberalizations of the 1980s and 1990s introducing for the first time effective institutional action in corporate affairs – as it happened in another major postwar economy, Japan, only with the financial crisis of the early 1990s. Other major institutional actions followed the wave of corporate scandals both in US. and Europe at the turn of the millennium, and the following Global Crisis of 2008-2009.
 
A further historical agent of change has been the rise of the global money management industry. Institutional investors, initially in the form of mutual and pension funds, have been increasingly relevant starting from the 1970s, in the US, then at the global level. Institutional investors increased considerably the demand for transparency, regulation, accountability and equal treatment of shareholders, to which in their turn companies reacted expanding the supply of self-regulation practices, including voluntary codes of conduct. The global nature of institutional investors has had, additionally, a further effect over the “globalization” of governance standards, which are now much more homogeneous at the international level than it was only twenty years ago.

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