How exactly did the corporate board come to be? This is an important question to consider when thinking about how important board director positions are today. The concept of corporate governance in practice dates back as far as the 12th-16th centuries. Although many of the fundamental principles of corporate governance have endured the test of time, the dynamics of how they operate, including the responsibilities of individual roles and the distribution of power and decision-making, have continued to evolve.
The earliest roots of the corporate board can be found in Medieval Europe, where merchants and traders formed partnerships, sharing risks and profits. During this period, guilds, associations of craftsmen and merchants who practiced trade, played a significant role in the economic and social structure of the medieval village. Guilds had a sort of board that oversaw their activities and made decisions regarding things like trade regulations and apprenticeships. The individuals on this board were typically elected by guild members. This is the first concept of an early corporate board, meaning there was a group of individuals responsible for making decisions collectively and overseeing an organization’s affairs.
More notably, the Dutch East India Company (the VOC), established in 1602, is highly regarded as one of the first multinational corporations. This company introduced a more formalized corporate governance structure. It had a board of directors and shareholders, serving as the template for modern corporate governance. More specifically, the VOC was made up of multiple private trading companies where individuals and directors acted as shareholders. Their liabilities were limited to their paid-in capital, meaning the company was essentially what is today known as a limited liability corporation. Critical elements of success for this board included the carefully balanced representation of shareholder interests and the director positions being filled by existing merchants who had authority over the investors. With these successes, we see the importance of separation of ownership and control and how a board should focus on policies that benefit the whole company.
In the 17th century, the formalization of stock exchanges was significant for defining corporate governance. Particularly, the establishment of the London Stock Exchange in 1698 greatly contributed to the development of joint-stock companies. Exchanges served as platforms to buy and sell shares of publicly traded companies, further reinforcing the need for corporate governance. This was more organized and transparent for companies who were aiming to raise capital by issuing shares to the public. Shareholders were able to vote on company affairs during general meetings, giving them a way to influence the board’s decision-making. The London Stock Exchange had requirements and regulations regarding financial disclosures and transparency of operations, which established levels of accountability in terms of corporate governance.
During the 19th century, the United States experienced a railroad boom, alongside the rapid expansion of modern corporations. The expansion of the railroad industry, during this period, led to the formation of many railroad companies and a surge in corporate activity. Therefore, corporate boards became more common, as growing companies needed increasingly complex management. The complexity and scale of railroad operations meant companies needed to improve their regulations and such. Many of these companies fell victim to financial speculation and fraud.
The Industrial Revolution marked a significant shift in business practices. This was a period that shifted manual labor-based economies to industrial and machine-driven ones. As industries expanded, the need for capital and management also increased. Capital accumulation led to the further emergence of joint-stock companies. The concept of limited liability became even more crucial to protect the financial responsibilities of investors, leading to newly developing legal structures and other management. The formation of corporations continued to expand.
Finally, in the 20th century, we witnessed the formalization of corporate governance. The term, “corporate governance,” wasn’t actually used until the 1970s and largely stayed within the United States. During this time, the role of the board became more defined, as corporations grew in influence, with an emphasis on representing shareholder interest, strategic planning, and management oversight.
Today, corporate boards are a necessary part of corporations, playing a crucial role in decision-making and oversight. The many historical pioneers, of simpler corporate governance systems and the framework of principles they began with, are still relevant to this day. Modern responsibilities of today’s board directors have changed greatly and their complexities will continue to evolve.