The term “corporate governance”, while now ubiquitous, was largely unknown in the U.S. until the 1970s and the rest of world until the 1990s. There has been little research done on why corporate governance rose to prominence when it did. Conceivably the lack of analysis could be because nothing more was going on than the adoption of a handy catch phrase encompassing already familiar topics and themes. In fact, the new terminology was accompanied by a reconfiguration of governance arrangements in U.S. public companies. These important changes coincided with and were related to the demise of a “managerial capitalism” era that reached its apex in the U.S. during the 1950s and 1960s. In my paper “Corporate Governance Since the Managerial Capitalism Era”, available at http://ssrn.com/abstract=2618480 and forthcoming in the Business History Review, I consider how and why corporate governance moved to the forefront in the manner it did as well as identify the implications for executives, directors and shareholders of public companies.
As the paper acknowledges, reaction to and analysis of corporate scandals occurring during the first half of the 1970s helped to lift the phrase “corporate governance” from linguistic obscurity and egregious misbehavior affecting companies such as Enron and WorldCom in the early 2000s served to “lock in” corporate governance institutionally by prompting a concerted regulatory response. The paper, however, focuses on different themes. The growing prominence of corporate governance in the years since the managerial capitalism era is explained primarily by reference to market and regulatory trends affecting the discretion senior executives of public companies had when running their firms.
During the managerial capitalism era neither boards nor shareholders – both staples of corporate governance discourse – provided meaningful oversight of executives. Nevertheless, it was relatively rare for executives to engage in Enron-style misbehavior that could jeopardize, at least in the short term, the future of their companies. Various constraints served to keep management on the straight and narrow. These included a sense of moral restraint fostered during the Great Depression and World War II, powerful unions, restrictions on access to finance during what was an era of “boring” banking and a bias in favor of caution that prevailed in firms that dominated oligopolistic markets sheltered from competition due to government regulation and a lack of foreign rivals.
By the 1990s, matters had been turned on their head by a strong deregulation drive, a pronounced weakening of union power, a surge in foreign competition and an unshackling of banks that liberalized access to financial resources. Executives correspondingly had in various ways discretion available to them their managerial capitalism predecessors could have barely contemplated. On the other hand, increasingly robust corporate governance, primarily in the form of more active boards and shareholders, introduced a substitute set of checks and balances.
The bolstering of corporate governance mechanisms in the 1990s failed to preclude the rise of the “imperial CEO” in U.S. public companies or corporate calamities such as Enron and WorldCom. Corporate governance-related constraints on executives became more robust, however, in the wake of those corporate scandals and the 2008-09 financial crisis. The imperial CEO became passé and it seems unlikely that chief executives will be returning to their 1990s pedestal any time soon. The upshot is that, due in large part to the growing prominence of corporate governance, today’s public company executives face a considerably different menu list of opportunities and constraints than their managerial capitalism era counterparts.
The preceding post comes to us from Brian R. Cheffins, the S J Berwin Professor of Corporate Law at the University of Cambridge. The post is based on his recent article, which is entitled “Corporate Governance Since the Managerial Capitalism Era” is forthcoming in the Business History Review and is available here.