According to the famous Australian banker, James Wolfensohn, “the governance of corporations

is now as important in the world economy as the government of countries”. At what time this
happened and what were the causes?

“Corporate governance” first came into use in the 1970s in the US. In 25 years time it had
become subject of debate worldwide Given the fact that “Corporate governance” has been with
us since the use of corporate form created the possibility of conflict between owner and manager.
It becomes necessary to begin with an overview on the historical origin of corporations.

The British East India Company was one of the first companies in the early 1600. It was a joint-
stock company, oriented towards favouring trade privileges in India. 125 shareholders, and a
capital of £72,000 composed the company. In those days, ownership was divided among a few
individuals that were also active members of the company’s board of directors. Companies were
built for specific purposes and partnership was the main form to organize jointly owned business
firms. In those days, transfer of ownership was limited, as there were no organized markets, and
therefore shares were only transferred to friends or relatives.

For the next 200 years, corporations in general were small institutions with specific purposes
such as transportation. In those days, corporations were not allowed to make political
contributions, and could not own any stock in other companies.

Industrialisation meant a huge impact on the development of bigger and more complex projects.
Between 1890 and 1910, corporations were transformed from state-controlled organisations to
unlimited private organisations protected under limited responsibility. This situation was
followed by the huge waves of capital demand from multinational corporations. Such demand
gave birth to what we know today as the stock exchange, which works as a bridge between
entrepreneurs and investors. As a consequence, credible and well functioning capital markets
were required for the development of a sustainable private enterprise sector. Markets for the
exchange of shares opened in New York and some European capital cities. Liberalization of
Capital Markets encouraged concerns on “Corporate Governance”.

In 1961 the Organisation for Economic Co-operation and Development was created, with the aim
of achieving the highest sustainable growth and contribute to a sound economic and world trade
expansion. The federal Securities and Exchange Commission (S.E.C.) brought corporate
governance on to the official US reform agenda in the mid-1970s, due to the corporate scandals
represented, according to a 1976 S.E.C. report, “frustration of the system of corporate
accountability”. Consequently, concerns about managerial and corporate accountability arised,
making necessary for markets to have a robust framework of corporate governance rules and
regulations that provided investors with confidence in the system and entrepreneurs with the
incentives to develop their businesses. By this time, the prospect of rigorous government
supervision and control over corporate governance had become the biggest challenge facing
private enterprises. In 1976, “The OECD Principles in Corporate Governance” were defined and
shaped under these ideas:

Ensuring the Basis for an Effective Corporate Governance Framework

Rights of Shareholders and Key Ownership Functions

The Equitable Treatment of Shareholders

The Role of Stakeholders in Corporate Governance

Disclosure and Transparency

The Responsibilities of the Board.

At the end of the 20th century, corporate governance was in everyone’s lips, the U.S. was doing
well and their corporate governance system appeared to be the dessired one. Suddenly A sharp
stock market decline precipitated, due to the “dot.com” bubble burst. Scandals, where major U.S.
public companies such as Enron and WorldCom were involved, destroyed what was the U.S.
transparent model of corporate governance. Since then, corporate governance became an issue of
worldwide debate.

To sum up, the growth of corporations and their new financing tools changed the way
organizations were structured and managed into more complex institutions. Thus, the gap
ownership/control stressed and a consecutive number of scandals, related to the abuse of power
and control, encouraged the concern on the way corporations were managed and the need to
regulate their practices. Today, good corporate governance should be directed towards achieving
the shareholders interests by implementing the correct framework and practices.