The Legal History of Corporate Governance in Europe

The Legal History of Corporate Governance in Europe

Abstract

Corporate governance refers to the systems put in place for directing, governance, and management of companies. Through the use of governance structures and governance principles, the distribution of responsibilities and rights among the various stakeholders in the corporate setting. Some of the stakeholders in the corporate governance include; the management board, directors, shareholders, creditors, regulators, among other parties that are involved in the decision-making process in the corporate world.  It is also necessary to identify that, due to the diverse nature of the various stakeholders in a given corporate institution, conflict of interest is an issue that is expected to arise from time to time during critical decision making processes and exercises. Corporate governance is therefore charged with the task of ensuring the resolution of the amicable differences among the relevant stakeholders are applied and that there is the most applicable decision which is best oriented towards addressing the underlying issue gets selected.

The history of corporate governance could get traced back to the early stages of the industrialization era when there was the emergence of household industries when domestic production of goods and services was on its early onset.

Introduction

The corporate governance tools applied in the corporate world today could be traced back to the early 17^th century in the Dutch Republic were in the year 1609 there was the occurrence of the first recorded corporate governance dispute that was recorded between the investors and shareholders in the Dutch East India Company that was also referred to as VOC. This was the world’s first company that was listed publicly. The concept of a publicly owned company was yet to be fully developed as per the current corporate governance rules and regulations. Still, the VOC Company exhibited most of the characteristics of a public company, and this could be attributed to the fact that the company’s ownership was public through shares. The expansion of the U.S economic sector from 1861-1865 also witnessed significant growth in the industrialization sector. This, therefore, saw the upcoming of various companies, which together resulted in the laying down of the corporate governance structure in the U.S.

In this research thesis paper, we are going to look into the legal history of corporate governance in the U.S. and how the law got integrated into the corporate world and the purpose which it was intended to serve. The legal aspect of corporate governance takes into account aspects of operation such as; necessity as well as stipulations of corporate management accountability, the structures of corporate boards, and the rights possessed by the shareholders. While the history of corporate governance has been identified to have existed from the 16^th century, the term corporate governance came to be conceptualized in the late 1970 and was used mostly in the U.S. there was the need to incorporate the law in corporate governance as it aided in the balance of power between the various classes of stakeholders in any corporate establishment.  This research paper is going to look into corporate governance, its legal history, and the changes through which these management aspects have gone through over the years, leading to the further enhancement of the corporate world.

The role of corporate governance in management is an essential corporate management tool that has been used to balance the division of power among the stakeholders in any given institution. As identified, corporate governance could be referred to as a management strategy that is used to ensure that corporations are in a position to develop effective managerial techniques that can facilitate the betterment as well as the improvement of the overall functional ability of the given corporate organization.

Depending on the kind of services that a given company provides, the corporate governance structure of the company varies to fit the sort of services offered. There is the necessity to differentiate between the day to day management activities of a given company and the corporate governance structures. While daily management activities may be prone to change from time to time depending on the prevailing market conditions, the organizational governance aspects remain mostly intact, and the alterations of any of these frameworks require to be addressed by the board. They can only be changed upon a proper board of management meeting to pass the proposed changes in the corporate outlined rules.

The U.S experienced significant corporate growth after the Second World War, and this necessitated the establishment of proper regulatory rules that could govern the corporate sector. There was an observation in the fast growth of corporations due to the ambient atmosphere that facilitated public companies to expand even further. However, in later developments, it was identified that there was the likelihood of experiencing legal issues in relation to the corporate governance of various institutions. This, therefore, led to the formation of legal statutes that governed how the corporations operated with regard to the outlined corporate rules and regulations.

Good governance is essential in the corporate world as t facilitates aspects such as accountability and transparency, which in turn translate into better business performance and stakeholder. With respect to corporate governance, it is evident that corporations that operate within the stipulated legal guidelines have smooth operations execution and also are more preferable for investors, funders among other stakeholders due to the transparency exhibited by these institutions. The legal history of corporate governance can, therefore, be traced back to this critical fundamental concept that ensured there was the protection of the investors as well as other stakeholders in the corporate world.

Importance of corporate governance in business enterprises from SME’S to higher revenue-generating institutions

Literature Review

In the above publication, Farrar has managed to present the reader with a proper understanding of the corporate governance principles, theories as well as policies that are essential in the corporate governance sphere (Farrar, 2008). Corporate governance has been identified to advocate for various business management aspects, which include transparency and accountability. It is, however, necessary to ensure that there are other underlying principles that facilitate the practical applications of the corporate governance legal implications. Some of the fundamental principles of corporate governance include;

1. Fairness- the fairness principle in corporate governance applies to the concept of ensuring that all the stakeholders in a given corporate management activity are provided with equal treatment on the board. In the U.K, the Company’s Act that was signed into law in 2006 was aimed at ensuring that there was the incorporation of the fairness principle in corporate governance from a legal perspective.
2. Accountability- ensures that there is the ability to follow up any actions that the management undertakes with a reasonable explanation that goes to show that the actions taken are in favor of the best needs of the corporation at hand. Good governance has been observed to contribute to effective management mostly, and accountability helps to ensure that the desired managerial outcomes get achieved.

• Responsibility- through the observation of responsible behavior in corporate governance, it is possible to ensure that every individual among the stakeholders is able to play the required roles in a timely and effective manner. This way, through responsible management, it becomes possible to accomplish an organization’s goals in the projected time frame that ensures enhanced productivity.

From a global point of view, the history of corporate governance could be traced back to the onset of capitalism in the early economies (Morck, R., & Steier, 2005). Capitalism could be viewed as a system in which independent corporations compete for the same customers as a move that was aimed at the abolishment of monopolies. According to Morck, R., & Steier, the real owners of America’s biggest corporations are thousands of middle-class individuals who own hundreds of shares in various publicly held corporations. As a result, due to the decentralized nature of the ownership of the above corporations, it is difficult for the small shareholders to have a voice big enough to have their voices heard in the corporate management. As a result, before the inception of the legal aspects of corporate governance, most of the significant CEO’s as well as other prominent players in management were pone to the abuse of power. Corporate law was therefore developed and institutionalized in the organizational management aspects to ensure that even the small stakeholders in the big corporations were protected from mismanagement by the management boards.

It is necessary to identify that under corporate law, corporations are treated as an individual that can be sued in the event of any business malpractice. The corporate lawyer is charged with the legal aspects of sales as well as business operations, as well as the distribution of goods and services (Winkler, 2004). Corporate law is, therefore, specifically involved with the managerial aspects of business, i.e., the roles and responsibilities of the board of governors and other stakeholders. Corporate law, therefore, aims to ensure that every individual in the given institution is protected from any business malpractices and that their investments are also safe from any business malpractices.

According to Farrar, the history of corporate governance could be traced back to the early times when the rights associated with organizational culture either originated from the royal crown or the church (Farrar, 1999). This was referred to as the public law privilege model. In later developments as the society became more developed and complicated, new institutions of power also came up, and there was the gradual decentralization of power form the initial authorities, i.e., the church and the crown.

According to Cheffins, the analysis of corporate governance has been identified to be a one-sided activity that has mainly focused on issues such as the mechanisms of internal accountability with respect to team players such as the management board as well as the shareholders (Cheffins, 2013). In his publication, Johnson focuses on the law as well as the responsibilities of corporate governance that is expected to be observed in the corporate world. Corporate law has become less strict than before. He finds that corporate management enjoys more liberty today in their functions than they did before (Johnson, 2012). Through amendments of various clauses governing corporate law, it is possible to identify that the lawyer appears to be shifting in favor of the main stakeholders in the business.

            Roe, on the other hand, takes in-depth research into the political and legal aspects of corporate governance. It is possible to see that politics have infiltrated into many aspects of corporate operations. Politics incorporate has been observed in areas such as in the board of management among other stakeholders involved in the given corporate activities at hand (Roe, 2005). Political events have gone hand in hand with the legal aspects of corporate governance, where some of the observed political differences have had to be settled in legally profiled cases.

Methodology

There were various approaches that were used in the collection of the data for the above study, i.e., both primary and secondary data. Secondary data was obtained from existent peer-reviewed published materials in the university library and other viable sources of secondary data. The materials used included; books, journals, magazine publications, among other sources of published data. Secondary data was essential for the research on the history of corporate governance in Europe because direct modifications in the corporate governance from former yeas could be accessed this way. On the other hand, primary data got obtained by conducting direct interviews on the relevant subjects in the field of corporate governance. The history of corporate governance in Europe can, therefore, be termed to as a broad perspective of the corporate management sector in Europe and all the activities that played a part in shaping the current state of the corporate industry.

The methodology also included the use of data from other sources such as the central and the repository where public information gets stored. As identified, the leading role of the corporate governance sector was to ensure that there is the provision of up to task management and business operation frameworks.

The 4 P’s of corporate governance

Corporate governance could be divided into four major broad categories that include; laws and regulations, the stakeholder’s interests, shareholders, and the board of directors. These are the four pillars of corporate governance where every key player is involved in playing a particular role in the implementation as well as the execution of the corporate management roles. Laws and regulations are interested in the legal aspect of corporate governance and how legal frameworks get incorporated into corporate governance operations. This includes the use of constitutional rules to come up with a well-developed and reliable system that ensures legal processes and procedures get implemented into the corporate world.

Stakeholders’ and shareholders’ interests, on the other hand, include the incorporation of the wants and the desired outcomes for those in the business setting to ensure that there is the ability to come up with the agreed-upon business prospects that the clients, i.e., the stakeholders signed up for. Initially, before the inception of the legal aspects of corporate governance, the stakeholders in the publicly owned companies had minimum say given that their small shares held in the company did not give them a say on the board. As a result, shareholders often got sidelined in the major decision making processes in the companies that they owned. Stakeholders’ interests were, therefore, an area of corporate governance that required to be addressed accordingly to ensure that the stakeholders had a voice in the publicly owned companies that they decided to invest their money.

Drivers of corporate governance

The presence of an excellent organizational management governance system is an indicator of the presence of a functional system with the capability to undertake and execute the various managerial exercises as required. Through providing business operatives with a framework on which they can conduct transparent business transactions, then it is possible to facilitate business growth through the undertaking of appropriate measures that promote sustenance as well as growth.

Fig.1 corporate governance system.

The corporate governance sector deals with the interactions between all the stakeholders in a given business setting organization whereby all involved play specific roles. The shareholders and the managers are required to be the key team players in ensuring that transparency and accountability get achieved in the quest for the incorporation of the legal aspects of corporate governance. In the legal perspective of the organizational governance structure in Europe, the managers were classified under the executive bodies given that under this category, this is where most managerial decisions get made. As a result, corporate governance tasks the managers with the responsibility of ensuring that the passed regulations are in accordance with the vision of the institution as well as the protection of the shareholder’s rights and interests.

Objectives of corporate governance

Corporate governance could be identified to have three main goals. These may get categorized as;

1. Operational risk management- corporate governance is involved with the making of informed business decisions that ensure that a business is able to carry out its operations and activities in an efficient manner. One way through which this could get achieved is through the management of operational risks in any given institution. These risks get managed and mitigated through the implementation of correct decision-making processes, which in turn, help in the alleviation of risks that may be associated with a given business operation. As a result, the management of operational risks gets identified as a critical objective in the legal aspects of corporate governance by ensuring that the wants and interests of the shareholders get protected.
2. Facilitation of transparency in business operations- this has been identified in various aspects of the legal issues of corporate governance whereby, through the integration of law into corporate management, it became possible to curb and address any instances of fraud or any illegal operations in business institutions. Transparency is an essential aspect of business operations as it ensures that there is the facilitation of the implementation of the legal issues of the corporate governance sector.

• Help in the realization of set-out goals and objectives- corporate governance was also identified to be an essential managerial aspect that helps to come up with active management principles that if adequately implemented help in the proper running of a given institution which supports in the overall running of the company as well as facilitates in the realization of the set-out objectives. Corporate governance, therefore, plays an essential role in the business sector and is a fundamental approach for any given institution that intends on meeting its set out short term and long term goals.

The relevance of the legal history of corporate governance case study

References

Farrar, J. (2008). Corporate governance: theories, principles, and practice. Oxford University       Press.

Morck, R., & Steier, L. (2005). The global history of corporate governance: An introduction. A     history of corporate governance around the world: Family business groups to professional managers (pp. 1-64). University of Chicago Press. Retrieved from;         https://www.tandfonline.com/doi/abs/10.1111/j.1540-627X.2008.00246.x

Hansmann, H., & Kraakman, R. (2017). The end of history for corporate law. Corporate   governance (pp. 49-78). Gower.

Winkler, A. (2004). Corporate law or the law of business?: stakeholders and corporate       governance at the end of history. Law and Contemporary Problems, 67(4), 109-133.

Farrar, J. H. (1999). A brief thematic history of corporate governance. Bond L. Rev., 11, i.

Cheffins, B. R. (2013). The history of corporate governance. The Oxford handbook of corporate   governance, 46-64.

Johnson, L. (2012). Law and the History of Corporate Responsibilities: Corporate Governance.    U. St. Thomas LJ, 10, 974.

Roe, M. J. (2005). Corporate governance: Political and legal perspectives. Edward Elgar Publishing.