The Origins of the Corporate Board
My name is Fiona Liu, and I’m a part of the executive advisory team. I’m here to introduce you to the executive advisory institute blog, which offers five weekly articles on board governance.
To understand the importance of board director positions, we must take a look at how governance boards came to be. While the pillars of governance have remained constant, the dynamics of how they operate have since evolved to encompass broader roles.
We will examine the historical emergence of boards to gain an understanding of the framework of modern governance, providing a foundation for directors today. The role of boards of directors is an always has been to protect and enhance the wellbeing of its corporation through their oversight of decision making processes surrounding resource allocation and risk tolerance. A variety of governance structures have emerged and evolved to this end while ubiquitous commonalities remain. A presence of intermediaries, periodic reports of fiscal status to owners, and an elected authority to appoint the leader.
The Dutch East India Company, or VOC for short, became the predecessors of corporate governance during the early 17th century, when they gained control of the East Indies trade market, and developed a socioeconomic system for market trading. The VOC was an aggregation of multiple private trading companies where the participants and managing directors acted as shareholders whose liabilities were limited to their paid-in capital. In short, it was what is today known as the limited liability corporation.
These progressive changes to corporate trade and allocated wealth created demands for new management strategies, leading to the early semblances of a governance board. Governance of the VOC was organized into six chambers. 17 delegates were selected from the managing shareholders to represent each chamber, with the last seat in rotation. They convened to administer executive decisions such as defining general policy, delegating operations, and more.
The key feature of success in this early board was the carefully balanced representation of shareholder interests, an effective assurance that policies will benefit the overall company.
Another important feature of this board was that its directors did not originate from its passive shareholders, rather it was managed by the preexisting individual merchants who collectively held legislative and adjudicative power above the investors. This separation of ownership and control is a fundamental property that must be held in order to advance a company’s wellbeing. We see this as a common pitfall of many companies throughout history.
The Dutch pioneered a simple corporate governance system and a framework of governance principles that still are upheld to this day. However, their bare bones model did not encompass the modern responsibilities of today’s boards of directors. The complexities and nuances of these responsibilities is something that we will continue to explore moving forward
I hope you find our biweekly articles useful in light of the challenges facing us today.